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Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset...

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Finance

Summer Tyme, Inc., is considering a new 3-year expansion projectthat requires an initial fixed asset investment of $4.158 million.The fixed asset will be depreciated straight-line to zero over its3-year tax life, after which time it will have a market value of$323,400. The project requires an initial investment in net workingcapital of $462,000. The project is estimated to generate$3,696,000 in annual sales, with costs of $1,478,400. The tax rateis 32 percent and the required return on the project is 18percent.

  

Required:
(a)What is the project's year 0 net cash flow?
  (Click toselect)   -4,620,000   -4,851,000   -4,389,000   -4,158,000   -5,082,000

  

(b)What is the project's year 1 net cash flow?
  (Click toselect)   1,951,488   2,146,637   2,049,062   1,853,914   1,756,339

  

(c)What is the project's year 2 net cash flow?
  (Click toselect)   2,049,062   1,853,914   1,756,339   2,146,637   1,951,488

  

(d)What is the project's year 3 net cash flow?
  (Click toselect)   2,765,070   2,896,740   2,501,730   2,370,060   2,633,400

  

(e)What is the NPV?

Answer & Explanation Solved by verified expert
4.3 Ratings (1033 Votes)

Cashflows of Year -0
Initial invstment in FA -4158000
Investment in WC -462000
Cashflows of Year -0 -4620000
Cashflows of Year -1 and 2
Annual sales 3696000
Less: Annual cost -1478400
Less: Depreciation (4158000/3) -1386000
Before tax Income 831600
Less: tax @ 32% 266112
After tax Income 565488
Add: Depreciation 1386000
Annual cashflows 1951488
Cashflows of Year -3
Annual sales 3696000
Less: Annual cost -1478400
Less: Depreciation (4158000/3) -1386000
Before tax Income 831600
Less: tax @ 32% 266112
After tax Income 565488
Add: Depreciation 1386000
Annual cashflows 1951488
Add: Release of WC 462000
Add: After tax Salvage 219912
(323400-32%)
Annual cash flows of Year-3 2633400
NPV
Year Cashflowws PVF at 18% Present value
0 -4620000 1 -4620000
1 1951488 0.847458 1653803
2 1951488 0.718184 1401528
3 2633400 0.608631 1602769
Net Present value 38100

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