Estimated annual sales: $540,000 Annual variable costs: $144,000 Estimated life: 3 years Annual fixed costs: $60,000...

Estimated annual sales: $540,000

Annual variable costs: $144,000

Estimated life: 3 years

Annual fixed costs: $60,000

Initial equipment cost (100% depreciated over 3-year life): $144,000

Initial investment in NWC (to be re-covered in year 3): $30,000

Tax rate: 25%

What is the firm’s annual Operating Cash Flow (OCF) for this project ($)?

What is the CFFA in year 3 ($)?Using the CFFA figures that you calculated, what is the NPV for this project if the required return is 11% ($)?

Expert Solution


1. Intial cash flow

Equipment cost	144000
Investment in NWC	30000
	174000

2. In between flows

	Sales	Variable cost	Fixed cost	Net income	Deprecition	CABT	Tax	CAT	Add: depreciation	Balance	Add: Working capital recapture	NET cash flow
Year1	540000	144000	60000	336000	48000	288000	72000	216000	48000	264000		264000
Year2	540000	144000	60000	336000	48000	288000	72000	216000	48000	264000		264000
Year 3	540000	144000	60000	336000	48000	288000	72000	216000	48000	264000	30000	294000

	**Depreciation = 144000/3

3. NPV
	CF	PVF	PVF x CF
Year 0	-174000	1	-174000
Year1	264000	0.9009	237837.6
Year2	264000	0.8116	214262.4
Year 3	294000	0.7311	214943.4

	NPV		493043.4

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