Question

The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds​ (1957 replicas). The necessary foundry equipment will cost a total of ​$3,900,000 and will be depreciated using a​ five-year MACRS​ life, LOADING... . The sales manager has an estimate for the sale of the classic Thunderbirds. The annual sales volume will be as​ follows: Year​ one:  230 Year​ four:  370 Year​ two:  270 Year​ five:  310 Year​ three:  340 If the sales price is ​$26,000 per​ car, variable costs are ​$18,000 per​ car, and fixed costs are ​$1,200,000 ​annually, what is the annual operating cash flow if the tax rate is 30​%? The equipment is sold for salvage for ​$500,000 at the end of year five. Net working capital increases by ​$500,000 at the beginning of the project​ (year 0) and is reduced back to its original level in the final year. Find the internal rate of return for the project using the incremental cash flows. ​First, what is the annual operating cash flow of the project for year​ 1?

MACRS Fixed Annual Expense Percentages by Recovery Class       

Year	​3-Year	​5-Year	​7-Year	​10-Year
1	​33.33%	​20.00%	​14.29%	​10.00%
2	​44.45%	​32.00%	​24.49%	​18.00%
3	​14.81%	​19.20%	​17.49%	​14.40%
4	​ 7.41%	​11.52%	​12.49%	​11.52%
5		​11.52%	​8.93%	​9.22%
6		​ 5.76%	​8.93%	​7.37%
7			​8.93%	​6.55%
8			​4.45%	​6.55%
9				​6.55%
10				​6.55%
11				​3.28%

Answer 1

Annua LOperating Cash Flow of the project for year 1 is $682,000

Internal Rate of Return of the project is 11.48%