Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.5 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $113,400 after 3 years. The project requires an initial investment in net working capital of $162,000. The project is estimated to generate $1,296,000 in annual sales, with costs of $518,400. The tax rate is 33 percent and the required return on the project is 10 percent. (Do not round your intermediate calculations.)

    

Required:
(a)	What is the project's year 0 net cash flow?
	(Click to select)-1,495,800-617,378-651,677-1,578,900-1,662,000

   

(b)	What is the project's year 1 net cash flow?
	(Click to select)617,378754,573651,677685,976720,274

  

(c)	What is the project's year 2 net cash flow?
	(Click to select)703,969778,070720,274741,020617,378

  

(d)	What is the project's year 3 net cash flow?
	(Click to select)912,407782,063720,274825,511868,959

  

(e)	What is the NPV?

Answer 1

Initial Investment = $1,500,000
Useful Life = 3 years

Depreciation Year 1 = 33.33% * $1,500,000
Depreciation Year 1 = $499,950

Depreciation Year 2 = 44.45% * $1,500,000
Depreciation Year 2 = $666,750

Depreciation Year 3 = 14.81% * $1,500,000
Depreciation Year 3 = $222,150

Book Value at the end of Year 3 = $1,500,000 - $499,950 - $666,750 - $222,150
Book Value at the end of Year 3 = $111,150

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $113,400 - ($113,400 - $111,150) * 0.33
After-tax Salvage Value = $112,657.50

Initial Investment in NWC = $162,000

Year 0:

Net Cash Flows = Initial Investment + Initial Investment in NWC
Net Cash Flows = -$1,500,000 - $162,000
Net Cash Flows = -$1,662,000

Year 1:

Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($1,296,000 - $518,400) * (1 - 0.33) + 0.33 * $499,950
Operating Cash Flow = $685,975.50

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $685,976

Year 2:

Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($1,296,000 - $518,400) * (1 - 0.33) + 0.33 * $666,750
Operating Cash Flow = $741,019.50

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $741,020

Year 3:

Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($1,296,000 - $518,400) * (1 - 0.33) + 0.33 * $222,150
Operating Cash Flow = $594,301.50

Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax Salvage Value
Net Cash Flows = $594,301.50 + $162,000 + $112,657.50
Net Cash Flows = $868,959

Required Return = 10%

NPV = -$1,662,000 + $685,976/1.10 + $741,020/1.10^2 + $868,959/1.10^3
NPV = $226,890