Question

The GE Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0.

The cane manufacturing machine will result in sales of 2,000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.

Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.

(A).      Calculate the total Free Cash Flows for each of the three years for the GE Corporation's new project.

(B).      What is the NPV for this project?

(C).      What is the IRR for this project?

Please show your work.

Answer 1

		Present Value (PV) of Cash flow=(Cash flow)/((1+i)^N)
		i=Discount ratecost of capital=10%	0.1
		N=Year of Cash flow
		Unit sales in year1	2000
		Unit sales in year2	2200	(2000*1.1)
		Unit sales in year3	2420	(2200*1.1)
	N	Year	0	1	2	3
	X	Cash flow for purchase of machine	($30,000)
	B=30000/3	Depreciation		$10,000	$10,000	$10,000
	C=B*0.35	Depreciation tax shield		$3,500	$3,500	$3,500
		Cash flow from Sales:
	D	Sales in units		2000	2200	2420
	E	Sales Price per unit		$18	$18	$18
	F=D*E	Sales Revenue		$36,000	$39,600	$43,560
	G	Cost per unit		$9	$9	$9
	H=D*G	Annual Cost		$18,000	$19,800	$21,780
	I=F-H	Before tax cash flow		$18,000	$19,800	$21,780
	J=I*(1-0.35)	After tax cash flow		$11,700	$12,870	$14,157
		Cash flow for Net Working Capital:
	K	Cash(2%)	$720	$792	$871
	L	Accounts Receivable(4%)	$1,440	$1,584	$1,742
	M	Inventory(9%)	$3,240	$3,564	$3,920
	O	Accounts payable(6%)	$2,160	$2,376	$2,614
	P=K+L+M-O	Net Working capital Required	$3,240	$3,564	$3,920
	Q	Cash flow due to change in working capital	($3,240)	($324)	($356)	$3,920
	A=C+J+Q+X	FREE CASH FLOW IN EACH YEAR	($33,240)	$14,876	$16,014	$21,577	SUM
	PV=A/(1.1^N)	Present Value of Cash Flow	($33,240)	$        13,524	$        13,234	$        16,211	$9,729
	NPV	NPV(Net Present Value)=Sum of PV	$9,729
	IRR	Using IRR function of excel over cash flow	24.92%