HALP!!! I know how to do part A, I just can\'t do part B. The answer is shown be
ID: 2645321 • Letter: H
Question
HALP!!! I know how to do part A, I just can't do part B. The answer is shown below, but I don't know how to get there. Any help is much appreciated! THANKS!!!
Part A: Summer Tyme, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.9 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,650,000 in annual sales, with costs of $840,000. If the tax rate is 35%, what is the OCF of this project? If the required return on the project is 12%, what is the project
Explanation / Answer
Annual sales = $2,650,000
Minus costs $840,000
Profit before depreciation and tax =$1,810,000
Minus depreciation (3,900,000/3) 1,300,000
Profit before tax = $510,000
Minus Tax@35% $178,500
Profit after tax = $331,500
Add: Depreciation $1,300,000
Operational cash flows = $1,631,500
NPV of the project:
Answer for PartB:
It is mentioned that $300,000 is the increase in net working captial in initial year. An increase in net working capital is always ploughed back at the end of the project, hence cash outflows in year 0 will increase by $300,000 and the cash inflows in the year 3 would increase by $300,000.
Also it is mentioned that market value of the fixed asset =$210,000
As the machine is already depreciated to 0, any value realized on sale is considered as profit, hence after tax cash in flow on sale of the fixed asset = $210,000*65% =$136,500
So,, Year 3 cash inflow =OCF+net gain on sale of fixed asset+increase in net working capital ploughed back.
=$1,631,500+$136,500+$300,000 =$2,068,000
Net present value of the project is as follows:
Particulars Year Cash outflow/Cashinflow Present value factor @12% Discounted cash flows Cost of fixed assset 0 -$3,900,000.00 1 -$3,900,000.00 Opertional cash flows 1 $1,631,500.00 0.892857143 $1,456,696.43 Opertional cash flows 2 $1,631,500.00 0.797193878 $1,300,621.81 Opertional cash flows 3 $1,631,500.00 0.711780248 $1,161,269.47 NPV $18,587.71Related Questions
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