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The TropicalFlowers Company is evaluating an asset that may increase sales by $120,000 every year for...

The TropicalFlowers Company is evaluating an asset that may increase sales by $120,000 every year for 4 years. There is no expected change in net operating working capital. The company's cost of capital is 6%. The proposed asset costs $400,000, will require $20,000 to modify for operations, and falls in the 3-year class MACRS for depreciation rates: .33, .45, .15, and .07 for years 1 through 4, respectively. At the end of the 4 years, it is expected that the asset may sell for $30,000. The company's tax rate is 21%. SHOW ALL WORK FOR FULL CREDIT.

a) What is the initial outlay for this project?

b) What are the operating cash flows in Years 1 through 4?

c) As part of the terminal cash flow in Year 4, what is the after-tax salvage value of the asset?

d) What is the net present value of this proposed asset investment? Should it be accepted or rejected?

Solutions

Expert Solution

Time line 0 1 2 3 4
Cost of new machine -420000
=a. Initial Investment outlay -420000
3 years MACR rate 33.00% 45.00% 15.00% 7.00% 0.00%
Sales 120000 120000 120000 120000
Profits Sales-variable cost 120000 120000 120000 120000
-Depreciation =Cost of machine*MACR% -138600 -189000 -63000 -29400 0 =Salvage Value
=Pretax cash flows -18600 -69000 57000 90600
-taxes =(Pretax cash flows)*(1-tax) -14694 -54510 45030 71574
+Depreciation 138600 189000 63000 29400
=b. after tax operating cash flow 123906 134490 108030 100974
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 23700
+Tax shield on salvage book value =Salvage value * tax rate 0
=c. Terminal year after tax cash flows 23700.00
Total Cash flow for the period -420000 123906 134490 108030 124674
Discount factor= (1+discount rate)^corresponding period 1 1.06 1.1236 1.191016 1.26247696
Discounted CF= Cashflow/discount factor -420000 116892.4528 119695.6212 90704.07115 98753.48537
d. NPV= Sum of discounted CF= 6045.63

Accept as NPV is positive

jeff jeffy answered 4 months ago
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