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 $876000. The fixed asset will be depreciated straight-line to 62000 over its 3-year tax life, after which time it will have a market value of $96000. The project requires an initial investment in net working capital of $44000. The project is estimated to generate $204000 in annual sales, with costs of $106000. The tax rate is 0.28 and the required return on the project is 0.12. What is the operating cash flow in years 1 through 3? (Make sure you enter the number with the appropriate +/- sign)?

Explanation / Answer

(a) Depriciation Per Year = (876000 – 62000) / 3 = 271333

Tax Savings on Depriciation = 271333 * 0.28 = 75973.24 for 3 years.

Present value of Tax Savings on Depriciation = 75973.24 * PVAF ( 12 % , 3)

= 75973.24 * 2.4018

= 182472.53

(b) Present value of working capital to be recovered in 3 rd year = 44000 * PVIF( 12 % , 3)

= 44000 *0.7117

= 31314.80

(c) Capital Gain = 96000 – 62000 = 34000

Tax on Capital Gain = 34000 * 0.28 = 9520

Net Salvage Value = 96000 – 9520 = 86480

Present Value of Salvage Value = 86480 * PVIF ( 12 % , 3)

= 86480 * 0.7117

= 61547.82

(d) Operating Income = 204000 – 106000 = 98000 p.a

Present Value of Operating Income for 3 years = 98000 * PVAF ( 12 %, 3)

= 98000 * 2.4018

= 235376.40

(e) Present value of net Operating cash Inflow for 3 years = (d) + (c ) + (a) + (b)

= $ 510711.55

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