Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.916 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 $226,800. The project requires an initial investment in net working capital of $324,000. The project is estimated to generate $2,592,000 in annual sales, with costs of $1,036,800. The tax rate is 31 percent and the required return on the project is 9 percent. Required:

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

(b) What is the project's year 1 net cash flow?

(c) What is the project's year 2 net cash flow?

(d) What is the project's year 3 net cash flow?

(e) What is the NPV?

Answer 1

Year 0 Net cash flow = - ( initial investment + Working capital investment ) = - ( 2916000 + 324000 )

-3240000

Sales	2592000
(-) Costs	1036800
(-) Depreciation [ 2916000/3 ]	972000
Income beforet tax	583200
(-) Taxes @ 31%	180792
Net income	402408
(+) Depreciation	972000
Annual cash flow	1374408

Year 1 Net cash flow = Annual cash flow	1374408
Year 2 Net cash flow = Annual cash flow	1374408
Year 3 Net cash flow = Annual cash flow + After tax salvage value + recovery of working capital = 1374408 + 226800*(1-31%) + 324000	1854900
NPV = 1374408/(1+9%) + 1374408/(1+9%)^2 + 1854900/(1+9%)^3 - 3240000	610059.62