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 $2.646 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 $205,800. The project requires an initial investment in net working capital of $294,000. The project is estimated to generate $2,352,000 in annual sales, with costs of $940,800. The tax rate is 34 percent and the required return on the project is 14 percent.

  

  

  

  

Required: (a) What is the project's year 0 net cash flow?

Explanation / Answer

Profit = (Revenue – Cost)*(1 – Tax) = (2352000 - 940800)*(1 - 0.34)

Profit = 931392

0 1 2 3 Initial investment -2,646,000 A Depreciation 882,000 882,000 882,000 Tax saving on depreciation @ 34% 299,880 299,880 299,880 B Book Value 0 Market Value 205,800 After-tax MV = MV - (MV - BV)*Tax 135,828 C Net change in WC -294,000 294,000 D Profit 931,392 931,392 931,392 E FCF -2,940,000 1,231,272 1,231,272 1,661,100 sum A to E NPV @ 14% 208,682.17

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