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 $3.9 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $306,600 after 3 years. The project requires an initial investment in net working capital of $438,000. The project is estimated to generate $3,504,000 in annual sales, with costs of $1,401,600. The tax rate is 34 percent and the required return on the project is 9 percent. (Do not round your intermediate calculations.)

1.) what is the projects year 0 net cash flow

2.) what is the projects year 1 net cash flow

3.what is the projects year 2 net cash flow

4. what is the projects year 3 net cash flow

5.) What is the NPV?

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.9 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $306,600 after 3 years. The project requires an initial investment in net working capital of $438,000. The project is estimated to generate $3,504,000 in annual sales, with costs of $1,401,600. The tax rate is 34 percent and the required return on the project is 9 percent. (Do not round your intermediate calculations.)

1.) what is the projects year 0 net cash flow

2.) what is the projects year 1 net cash flow

3.what is the projects year 2 net cash flow

4. what is the projects year 3 net cash flow

5.) What is the NPV?

Explanation / Answer

First We have to calculate depreciation as per MACRS Rates as follows:

The percentage of depreciated value is 92.59% after three years (i.e., 33.33% + 44.45% + 14.81%). Book value of the equipment at the end of 3 years will be:

Book Value at the endof 3 rd year = $3,900,000 - $3,611,010 =$288,990

The asset is sold at a Profit to book value, so thisProfit is taxable :

After tax salvage value year 3 = $306,600 +($306,600-$288,990)*0.34 =$306,600 +$5,987.4=$312,587.4

As shown in above table

1.) what is the projects year 0 net cash flow =($4,338,000)

2.) what is the projects year 1 net cash flow=$1,829,540

3.what is the projects year 2 net cash flow=$1,976,991

4. what is the projects year 3 net cash flow=$2,334,552

5.) What is the NPV?=$807,173

Year MACRS Rates % Deprecation $ 1 33.33 3900000*33.33%                 1,299,870 2 44.45 3900000*44.45%                 1,733,550 3 14.81 3900000*14.81%                     577,590 Total 92.59                 3,611,010

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