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Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $4.32 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 $336,000. The project requires an initial investment in net working capital of $480,000. The project is estimated to generate $3,840,000 in annual sales, with costs of $1,536,000. The tax rate is 31 percent and the required return on the project is 11 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?
The most important indirect cost is the loss in value that results from cutbacks in promising investment when the firm gets into financial trouble.
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