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. 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%

Year 0

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 1

Year 2

Year 3

Revenue
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)

a)

c)

IRR

$
$
$
$
$
$
$

2,600,000
624,000
1,300,000
676,000
236,600
439,400
1,739,400

$
$
$
$
$
$
$

3,100,000
744,000
1,300,000
1,056,000
369,600
686,400
1,986,400

$
$
$
$

260,000
(40,000)
1,501,800

$
$
$
$

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

310,000
195,000
2,491,400

Use Excel formulas for a) and c) below

Total Cash Flow

Discount rate

b) Accept/Reject

2,200,000
528,000
1,300,000
372,000
130,200
241,800
1,541,800

16.36%

Problem 2

NPV

$
$
$
$
$
$
$

Year 0
(10,000) $

232.28
Accept
17.366%

Year 1

Year 2
4,200 $

Year 3
4,500 $

5,100
16%

uires an
over its
e project is
00 for year
orking
ash flows for

del).