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 $1.512 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $117,600. The project requires an initial investment in net working capital of $168,000. The project is estimated to generate $1,344,000 in annual sales, with costs of $537,600. The tax rate is 32 percent and the required return on the project is 18 percent.

1.) what is the year 0 net cash flow

2.) what is the year 1 net cash flow

3.) what is the year 2 net cash flow

4.) what is the year 3 net cash

5.) What is the NPV

Explanation / Answer

All the questions will be answered in 2 steps :

step1: computation of cash flows for all the years

step2: computation of NPV

step 1:

Before we start step 1 i would like to show the calculation for depreciation:

Depreciation = (investment - salvage )/no of years

= (1512000-117600)/3

depreciation per year = $464800

step1: computation of cash flows

step 2: will show the year 0 cash outflow and NPV:

Particulars/Formulas 1 2 3 sales 1344000 1344000 1344000 cost -537600 -537600 -537600 Gross profit 806400 806400 806400 Depreciation 464800 464800 464800 Profit before tax = gross – depreciation 341600 341600 341600 tax at 32% 109312 109312 109312 Profit after tax = profit before – tax 232288 232288 232288 Cash flow each year = profit+depreciation 697088 697088 697088

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