Homework SourseSummer Tyme Inc is considering a new 3year expansion project
Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.726 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $289,800. The project requires an initial investment in net working capital of $414,000. The project is estimated to generate $3,312,000 in annual sales, with costs of $1,324,800. The tax rate is 30 percent and the required return on the project is 17 percent. Required:
(a) What is the project\'s year 0 net cash flow?
(b) What is the project\'s year 1 net cash flow?
(c) What is the project\'s year 2 net cash flow?
(d) What is the project\'s year 3 net cash flow?
(e) What is the NPV?
Solution
(a) Project\'s year 0 net cash flow $ -41,40,000 Working: Investment in Fixed Asset $ 37,26,000 Investment in net working capital $ 4,14,000 Year 0 cash flow $ 41,40,000 (b) Project\'s year 1 net cash flow $ 17,63,640 Working: Straight line depreciation = (Cost -salvage value)/Useful Life = (3726000-0)/3 = $ 12,42,000 Annual Sales 33,12,000 Cost of sales -13,24,800 Depreciation -12,42,000 Profit before tax 7,45,200 Tax -2,23,560 Net Income 5,21,640 Depreciation 12,42,000 Cash flow 17,63,640 (c) Project\'s year 2 net cash flow $ 17,63,640 (d) Project\'s year 3 net cash flow $ 23,80,500 Working: After tax sale proceeds of asset = 289800*(1-0.30) = 2,02,860 After tax sale proceeds of asset 2,02,860 Release of net working capital 4,14,000 Operating cash flow 17,63,640 Total Cash flow 23,80,500 (e) NPV $ 1,42,061.64 Working: Year Cash flow Discount factor Present Value 0 $ -41,40,000 1.0000 $ -41,40,000.00 1 17,63,640 0.8547 15,07,384.62 2 17,63,640 0.7305 12,88,362.92 3 23,80,500 0.6244 14,86,314.11 NPV 1,42,061.64
