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Edna K.

Odonkor
FIN 3320 Assignment 2 problems
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%
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 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).
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 Year 1 Year 2 Year 3
Revenue - $ 2,200,000 $ 2,600,000 $ 3,100,000 $
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 232.28 $
b) Accept/Reject Accept
c) IRR 17.366%
16%