In: Finance
Rex inc currently has one product, low-priced stoves. Rex Inc has decied to sell a new line of medium-priced stoves. Sales for the new line of stoves are estimated at 6 million a year. Variable costs are 70% of sales.The project is expected to last 10 years. In addition to the production variable costs, the fixed costs each year will be 1,000,000. The company has spent $1,000,000 in research and a marketing study that determined the company will lose 800,000 in sales a year of its existing low-priced stoves.The production variable cost of the existing low-priced stoves is 500,000 a year. The plant and equipment required for producing the new line of stoves costs 2,000,000 and will be depreciated down to zero over 20 years using straight line depreciation. It is expected that the plant and equipment can be sold (market or scrap value) for $500,000 at the end of 10 years. The new stoves will also require today an increase in net working capital of $400,000 that will be returned at the end of the project. The tax rate is 25 percent and the cost of capital is 10%.
7 part question
What is the initial outlay for this project?
What is the annual EBITDA for this project?
What is the annual taxable income for this project?
What is the annual net income for this project?
What is the operating Cashflow for this project?
What is the remaining book value for the plant at equipment at the end of the project?
What is the termination value for this project?
1) | Cost of plant and equipment | $ 20,00,000 | |
Increase in NWC | $ 4,00,000 | ||
Initial outlay for the project | $ 24,00,000 | ||
2) | Sales for the new line of stoves | $ 60,00,000 | |
Variable costs [70%] | $ 42,00,000 | ||
Fixed costs | $ 10,00,000 | ||
EBITDA for the new stove | $ 8,00,000 | ||
Loss of EBITDA on existing stoves [800000-500000] | $ 3,00,000 | ||
EBITDA for the project | $ 5,00,000 | ||
3) | EBITDA for the project | $ 5,00,000 | |
Less: Depreciation [2000000/20] | $ 1,00,000 | ||
Annual taxable income for the project | $ 4,00,000 | ||
4) | Less: Tax at 25% | $ 1,00,000 | |
Annual net income | $ 3,00,000 | ||
5) | Add: Depreciation | $ 1,00,000 | |
Annual operating cash flow for the project | $ 4,00,000 | ||
6) | Remaining book value = 2000000-1000000 = | $ 10,00,000 | |
7) | Salvage value of the plant | $ 5,00,000 | |
Loss on sale | $ 5,00,000 | ||
Tax shield on loss at 25% | $ 1,25,000 | ||
After tax salvage value = 500000+125000 = | $ 6,25,000 | ||
Add: Recapture of NWC | $ 4,00,000 | ||
Termination value for the project | $ 10,25,000 |