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 $5.2 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $407,400 after 3 years. The project requires an initial investment in net working capital of $582,000. The project is estimated to generate $4,656,000 in annual sales, with costs of $1,862,400. The tax rate is 33 percent and the required return on the project is 16 percent. (Do not round your intermediate calculations.)

Explanation / Answer

(a) What is the project's year 0 net cash flow? $       -57,82,000 (b) What is the project's year 1 net cash flow? $         24,43,655 (c) What is the project's year 2 net cash flow? $         26,34,474 (d) What is the project's year 3 net cash flow? $         31,07,965 (e) What is the NPV? $           2,73,584 Workings: Year 0 1 2 3 Total Investment in fixed asset         -52,00,000 Investment in net working capital           -5,82,000 Annual Sales             46,56,000        46,56,000        46,56,000 Cost of goods sold            -18,62,400       -18,62,400       -18,62,400 Depreciation Expenses            -17,33,160       -23,11,400         -7,70,120 Profit Before Tax             10,60,440           4,82,200        20,23,480 Tax Expense              -3,49,945         -1,59,126         -6,67,748 Net Income                7,10,495           3,23,074        13,55,732 Depreciation Expenses             17,33,160        23,11,400           7,70,120 Operating cash flows             24,43,655        26,34,474        21,25,852 After tax sale of fixed asset           4,00,114 Release of net working capital           5,82,000 Total Cash flows         -57,82,000             24,43,655        26,34,474        31,07,965 Discount factor                1.0000                   0.8621              0.7432              0.6407 Present Value         -57,82,000             21,06,599        19,57,843        19,91,142 $       2,73,584 Working: a. Depreciaton Schedule: Year Cost Depreciation rate Depreciation expense Accumulated Depreciation expense Book Value 1           52,00,000 33.33%             17,33,160        17,33,160         34,66,840 2           52,00,000 44.45%             23,11,400        40,44,560         11,55,440 3           52,00,000 14.81%                7,70,120        48,14,680           3,85,320 b. Sales Price after 3 years                4,07,400 Less Book Value at the end of Year 3                3,85,320 Profit on sale                   22,080 Tax on profit                      7,286 after tax sale proceeds                4,00,114

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