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FIN 3320 Assignment 2 problems

John Nguyen

Problem 1

Revenue t=1 2,200,000$

Revenue t=2 2,600,000$

Revenue t=3 3,100,000$

Investment 3,900,000$

Depr. years 3 SL

Final book value -$FA Sale value 300,000$

NWC req't 10%

Costs 24%

Tax rate 35%

Year 0 Year 1 Year 2 Year 3

Revenue -$ 2,200,000$ 2,600,000$ 3,100,000$

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: $2,000,000 for year one, $2,600,000 for year

two, and $3,100,000 for year three. Costs are equal to 24% of the same yearsales. The project net working

capital is equal to 10% of the next year'srevenue. 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).

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.

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Expenses -$ 528,000$ 624,000$ 744,000$

Depreciation -$ 1,300,000$ 1,300,000$ 1,300,000$

EBIT -$ 372,000$ 676,000$ 1,056,000$

Taxes -$ 130,200$ 236,600$ 369,600$

Net Income (NI) -$ 241,800$ 439,400$ 686,400$

CF from Operations -$ 1,541,800$ 1,739,400$ 1,986,400$

NWC total req't 220,000$ 260,000$ 310,000$

Change in NWC (220,000)$ (40,000)$ (50,000)$ 310,000$

CF -Capital Spending (3,900,000)$ -$ -$ 195,000$

Total CF (4,120,000)$ 1,501,800$ 1,689,400$ 2,491,400$

Project IRR 16%

Problem 2 Use Excel formulas for a) and c) below

Year 0 Year 1 Year 2 Year 3

Total Cash Flow $ (10,000) $ 4,200 $ 4,500 $ 5,100

Discount rate

a) NPV $200.24

b) Accept/Reject Accept

c) IRR 17.366%

16%