FIN 3320 Assignment

Problem 1 Problem 1

Keith Phillips Finance 3320.00 Oct 28,2013

Summer Tyme, Inc. has cash available and is considering a new three-year expansion project that requires an initial fixed asset investment of $3.9 million. The fixed assets will be depreciated straight-line to zero over its three-year tax life. The fixed assets will have a market value of $200,000 at the end of the project. The project is estimated to generate following revenues during those three years: $2,000,000 for year one, $2,500,000 for year two, and $3,000,000 for year three. Costs are equal to 20% of the same year sales. The project net working capital is equal to 10% of the next year's revenue. The tax-rate is 35%. What are the projects net cash flows for years 0-3? What is the IRR on this project?

Revenue t=1 Revenue t=2 Revenue t=3 Investment Final book value FA Sale value NWC req't Costs Tax rate Depr. years

$ $ $ $ $ $

2,000,000 2,500,000 3,000,000 3,900,000 200,000 10% 20% 35% 3 Year 0 Year 1 2,000,000 $ 400,000 $ 1,300,000 $ 300,000 $ 195,000 $ 1,495,000 $ 250,000 -$50,000 1,445,000 $ $ $ Year 2 2,500,000 500,000 1,300,000 700,000 455,000 1,755,000 300,000 -$50,000 1,705,000 Year 3 3,000,000 600,000 1,300,000 1,100,000 715,000 2,015,000

Revenue Expenses Depreciation EBIT Net Income (NI) CF from Operations NWC req't Change in NWC CF from Investment Total CF Project IRR Project NPV
Problem 2

$ $ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $ $ $

200,000 $ -$200,000 $ (3,900,000) $ $ (4,100,000) $ 16.33% 512,284.00

$ $

300,000 2,515,000

Total Cash Flow Opportunity Cost of Capital a) NPV b) Accept/Reject c) IRR

Year 0 (1,000) $

Year 1 400 $

Year 2 450 $

Year 3 500 17%

($17.20) Reject 15.975%

Calculator Ans -17.2 Reject 15.98%

Interest expressed as decimal 0.17

Keith Phillips Finance 3320.005 Oct 28,2013

requires an initial ver its three-year tax estimated to ear two, and g capital is equal to 3? What is

Equal to Corresponding Revenue t= Revenue * Tax Rate Investment-Final Book Value (0) / Depr. Years Revenue- Expenses-Depreciation EBIT-(EBIT *Tax Rate) or EBIT *(1-tax rate) Net Income with Deprec. Added back

$200,000 <<<FA Sale Value

essed as decimal