FIN 3320 Assignment

2 problems

Problem 1 Problem 1 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. For tax purposes, 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 $300,000 at the end of the project. The project is estimated to generate following revenues during those three years: $2,200,000 for year one, $2,600,000 for year two, and $3,100,000 for year three. Costs are equal to 24% 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? Use available Excel template and complete using "best practices" (use formulas - no hardcoding in model).

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

$ $ $ $ $ $

2,200,000 2,600,000 3,100,000 3,900,000 3 SL 300,000 10% 24% 35%

You may use positive or negative numbers in this section below in any consistent manner. Please make sure your Excel formulas are consistent and that your cash flow numbers are correct.

Year 0 Revenue $ $

Year 1 2,200,000

Year 2 2,600,000

Year 3 3,100,000

Expenses Depreciation EBIT Taxes Net Income (NI) CF from Operations NWC total req't Change in NWC CF -Capital Spending Total CF Project IRR

$ $ $ $ $ $ $ $ $ $

220,000 (220,000) (3,900,000) (4,120,000) 16.36%

$ $ $ $ $ $ $ $ $ $

528,000 1,300,000 372,000 130,200 241,800 1,541,800 260,000 (40,000) 1,501,800

$ $ $ $ $ $ $ $ $ $

624,000 1,300,000 676,000 236,600 439,400 1,739,400

$ $ $ $ $ $

744,000 1,300,000 1,056,000 369,600 686,400 1,986,400

310,000 (50,000) $ $ 1,689,400 $

310,000 195,000 2,491,400

Problem 2

Use Excel formulas for a) and c) below Year 0 (10,000) $ Year 1 4,200 Year 2 $ 4,500 $ Year 3 5,100 16%

Total Cash Flow Discount rate a) NPV b) Accept/Reject c) IRR

$232.28 Accept 17.366%