Summer Tyme, Inc., is considering a new three-year expansion project that requir

Question

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 percent, what is the OCF for this project? In the previous problem, suppose the required return on the project is 12 percent. What is the project's NPV?

Explanation / Answer

Hi, Please find the answer as follows: Annual Cash Flows = Sales - Costs = 2650000 - 840000 = 1810000*.65 = 1176500 Tax Saving on Account of Depr = 1300000*.35 = 455000 Total Cash Flow = 1176500 + 455000 = 1631500 = -3900000 + 1613500/(1+.12)^1 + 1613500/(1+.12)^2 + 1613500/(1+.12)^3 = -24645.25 Thanks, Aman

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.