Summer Tyme, Inc., is considering a new 3-year expansion project that requires a
ID: 2651171 • Letter: S
Question
Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.566 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will be sold for $121,800. The project requires an initial investment in net working capital of $174,000, all of which is recovered at the end of the project. The project is estimated to generate $1,392,000 in annual sales, with costs of $556,800. The tax rate is 35 percent and the required return on the project is 10 percent. What is the project's year 3 net cash flow and NPV?
Explanation / Answer
Statement showing calculation of NPV Particulars Time PVF Amount PV Cash outflows(Purchase of asset) - 1.0000 (1,566,000.00) (1,566,000.00) Cash outflows(Invt in WC) - 1.0000 (174,000.00) (174,000.00) PV of cash outflows (1,740,000.00) Cash Inflows 1.00 0.9091 725,580.00 659,618.18 Cash Inflows 2.00 0.8264 725,580.00 599,652.89 Cash Inflows 3.00 0.7513 725,580.00 545,138.99 Cash Inflows(Salvage Value) 3.00 0.7513 79,170.00 59,481.59 Cash Inflows(Working Capital) 3.00 0.7513 174,000.00 130,728.78 PV of Cash Inflows 1,994,620.44 NPV 254,620.44 Salvage Value 121,800.00 Tax Rate 35% 42,630.00 Salvage Value (Net of Tax) 79,170.00 Sales 1,392,000.00 Cost 556,800.00 Depreciation(1566000/3) 522,000.00 Profit before Tax 313,200.00 Tax @35% 109,620.00 Profit After tax 203,580.00 Add depreciation 522,000.00 Cash flows after tax 725,580.00 Time PVF WN 1.00 0.9091 1/1.10 2.00 0.8264 .9091/1.10 3.00 0.7513 .8264/1.10
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