Summer Tyme, Inc., is considering a new 3-year expansion project that requires a

Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $4.59 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 $357,000. The project requires an initial investment in net working capital of $510,000, all of which is recovered at the end of the project. The project is estimated to generate $4,080,000 in annual sales, with costs of $1,632,000. The tax rate is 31 percent and the required return on the project is 13 percent.

The only one I missed is E which I cant seem to get correct. A-D are already correct.

Required: (a) What is the project's year 0 net cash flow? HINT: This will not include OCF. (Click to select)-5,610,000-4,845,000-5,355,000-5,100,000-4,590,000

Explanation / Answer

Solution :

Calculation of Net Present Value :

Therefore The NPV of Project is $ 787,262

Year    0 1 2 3 1 Sales $4,080,000 $4,080,000 $4,080,000 2 Less : Costs 1,632,000 1,632,000 1,632,000 3 Contribution Margin Income (1 - 2) 2,448,000 2,448,000 2,448,000 4      Less:     Depreciation 1,411,000 1,411,100 1,411,000 5 Net Profit Before Taxes ( 3 - 4) 1,037,700 1,037,700 1,037,700 6 Less : Taxes @ 31%     321,470 321,470 321,470 7 Net Income After Taxes (5 - 6)     716,230 716,230 716,230 8 Cash Flow from operations ( 7+4) 2,127,230 2,127,230 2,127,230 9 Initial Investment -($4,590,000) - 10 Changes in Net working capital    - (510,000) - 11 Total Cash flow from Investment -( 5,100,000) - 12 Total Cash Flow -( 5,100,000) 2,127,230 2,127,230 2,127,230 13 Present Value Factor @ 13%    1.000 0.884 0.783 0.693 14 Present Value of Total Cash flow ( 12 x13) -(5,100,000) 1,880,471 1,665,621 1,474,170 15 Sale of Fixed Assets - - -    357,000 16 Recovery of Net Working Capital    510,000 17 Total Cash flow -(5,100,000) 1,880,471 1,665,621 2,341,170 18 Net Present Value (Sum of Present value of Total cash flow for 3 years) 787,262

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