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CRAMD has the following revenue and lost estimates for the next two years: sales = 4...

CRAMD has the following revenue and lost estimates for the next two years:

sales = 4 million units/year for (two years)
-per unit price=$22, per unit cost= $16 up front
R&D= 8 million Up front New Equipment= 20 million expected life of the new equipment is 2 years. Annual overhead= 1.6 million (for 2 years). Assume there is no need to make an investment in working capital and that this projext ia one project among many projects that CRAMD is undertaking and that CRAMD regularly makes large profita each year. Tax rate: marginal rate of 40%

use that above infor to create an income statment that shows net income for current year and next two years. Calculate your free cashflow for for 2 years 0-2. calculate the NPV of this potential investment if appropriate cost of capital is 12%. Depricciate the equipment equally over the equipments life span.

free cash flow for year 1?

a. 7.44 million
b 15.65 mil
c 4.67 mil
d. 4.8 mil
e. 24.8 mil
f. 12.88 mil
g 2.89 mil
h3.25 mil
i. 17.44 mil
j -20 mil

Solutions

Expert Solution

The Net Income (Profit after Tax) as well as Free Cashflows for the years 0-2 is shown in the Project's Income statement below :

year 0 1 2
Sales (units) 0 4000000 4000000
Sales ($) 0 88000000 88000000
Cost($) 0 64000000 64000000
Annual Overhead($) 0 1600000 1600000
Depreciation ($) 0 10000000 10000000
R&D 8000000
Profit Before Tax -8000000 12400000 12400000
Less Tax @40% -3200000 4960000 4960000
Profit after Tax -4800000 7440000 7440000
Add: Depreciation 0 10000000 10000000
New Equipment Cost -20000000 0 0
Free Cashflow -24800000 17440000 17440000

(Assuming that the R&D upfront is treated as expense)

Free Cashflow for the year 1 = $17.44 million  (option i)

jeff jeffy answered 2 years ago
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