Question

- We assume that the company you selected is considering a new project. The project has 8 years’ life. This project requires initial investment of $195 million to purchase land, construct building, and purchase equipment, and $15 million for shipping & installation fee. The fixed assets (Total of 195+15= $210 M) fall in the 7-year MACRS class. The salvage value of fixed assets is $38 million. The number of units of the new product expected to be sold in the first year is 880,000 and expected to grow at annual growth rate of 9%. The sales price is $266 per unit and the variable cost is $179 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 2.8%. The required net operating working capital (NOWC) foe each year is 15% of sales for that year. The company is in the 21% tax bracket. The project is assumed to have the same risk as the corporation you have chosen, so you should use the WACC you obtained from prior steps as the discount rate. Compute the depreciation basis and annual depreciation of the new project. (Please refer to table of 11A-2, page 496 for 16th edition). - Estimate annual cash flows of the project for all the 8 years. - Draw a time line of the cash flows.

Answer 1

Annual Depreciation:

on SLM basis

(Total Cost - Salvage value)/useful life

($210M-$38m)/7

$24.57M

Cash Flow
Year	1	2	3	4	5	6	7	8
Expected sale	8,80,000	9,59,200	10,45,528	11,39,626	12,42,192	13,53,989	14,75,848	16,08,674
rate	266	274	281	289	298	306	315	324
Sale	2340,80,000	2623,93,380	2941,31,434	3297,08,396	3695,88,605	4142,92,564	4644,03,735	5205,76,154
cost	179	184	189	195	200	206	212	218
(266-179)
COst	1575,20,000	1765,72,989	1979,30,552	2218,71,439	2487,08,121	2787,90,861	3125,12,288	3503,12,524
Cot'n	765,60,000	858,20,391	962,00,883	1078,36,957	1208,80,483	1355,01,703	1518,91,447	1702,63,629
working capital	35112000	39359007.07	44119715.13	49456259.39	55438290.71	62143884.6	69660560.3	78086423.03
net cf	414,48,000	464,61,384	520,81,167	583,80,697	654,42,193	733,57,819	822,30,887	921,77,206
Dep	24,57,000	24,57,000	24,57,000	24,57,000	24,57,000	24,57,000	24,57,000	24,57,000
CF After dep	389,91,000	440,04,384	496,24,167	559,23,697	629,85,193	709,00,819	797,73,887	897,20,206
Tax @ 21%	8188110	9240920.7	10421075.17	11743976.41	13226890.49	14889171.92	16752516.26	18841243.29
CFAT	308,02,890	347,63,464	392,03,092	441,79,721	497,58,302	560,11,647	630,21,371	708,78,963