Question

In: Finance

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


Related Solutions

The DoNotMissSnow Company is evaluating an asset that may increase sales by $120,000 every year for...
The DoNotMissSnow 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...
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...
A firm acquires an asset for $120,000 at the beginning of year 1. The asset will...
A firm acquires an asset for $120,000 at the beginning of year 1. The asset will generate $50,000 of revenues in each year. For financial reporting purposes, the asset will be depreciated straight line to zero over four years. For tax purposes, it will be depreciated straight line to zero over three years. Assume the firm has no other expenses apart from depreciation expense. The tax rate is 40%. Use this information to answer Questions (7) - (12). At the...
Consider a position consisting of a $120,000 investment in asset A and a $120,000 investment in...
Consider a position consisting of a $120,000 investment in asset A and a $120,000 investment in asset B. Assume that the daily volatilities of both assets are 1% and that the coefficient of correlation between their returns is 0.4. What are the five-day 95% VaR and ES for the portfolio?
Consider a position consisting of a $120,000 investment in asset A and a $120,000 investment in...
Consider a position consisting of a $120,000 investment in asset A and a $120,000 investment in asset B. Assume that the daily volatilities of both assets are 1% and that the coefficient of correlation between their returns is 0.4. What are the five-day 95% VaR and ES for the portfolio?
Super Company had the following data for recent year. Cash Sales $120,000 Credit Sales 650,000 Accounts...
Super Company had the following data for recent year. Cash Sales $120,000 Credit Sales 650,000 Accounts receivable determined to be uncollectible 4,500 Allowance for doubtful. accounts 15,000(cr) Management estimates that 2.5% of the credit sales will not be collected A) Prepare the journal entry to record the write off the uncollectible accounts B) Prepare the journal entry to record the estimate of bad debt expense? C) Prepare the journal entry for the recovery of $2,000 of previously written off. D)...
A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and...
A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and would be depreciated for tax purposes using the straight-line method over an estimated ten-year life to its expected salvage value of $20,000. The new machine would require an addition of $30,000 to working capital. In each year of Machine A’s life, the company would reduce its pre-tax costs by $40,000. The company has a 12% cost of capital and is in the 35% marginal...
A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and...
A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and would be depreciated for tax purposes using the straight-line method over an estimated ten-year life to its expected salvage value of $20,000. The new machine would require an addition of $30,000 to working capital. In each year of Machine A’s life, the company would reduce its pre-tax costs by $40,000. The company has a 12% cost of capital and is in the 35% marginal...
A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and...
A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and would be depreciated for tax purposes using the straight-line method over an estimated ten-year life to its expected salvage value of $20,000. The new machine would require an addition of $30,000 to working capital. In each year of Machine A’s life, the company would reduce its pre-tax costs by $40,000. The company has a 12% cost of capital and is in the 35% marginal...
Month Sales January $100,000 February $120,000 March $150,000 April $180,000 May $150,000 June $120,000 July $150,000...
Month Sales January $100,000 February $120,000 March $150,000 April $180,000 May $150,000 June $120,000 July $150,000 August $180,000 Actual November and December 2018 sales were $200,000 and $90,000, respectively. Cash sales are 45% of the total and the rest are on credit. About 70% of credit sales are typically collected one month after the sale and 30% the second month. Monthly inventory purchases represent 50% of the following month’s sales. The firm pays 40% of its inventory purchases in cash...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT