Question

In: Finance

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.

NPV of the project?

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

Depreciation Exp     =     Initial Investment   - salvage value / useful life of asset                                                 

                               =        20     -   0           /    2                                                             

                                =       $10m                                             

                                                                               

annual over head = $1.6 Million for 2 years, so per year   = $ 0.8milllion (1.6/2)       

at y0, there is an outflow to the extent of $20M for a new equipment . R&D expenditure of $ 8M- presumed to be incurred in the year 0 and is considered as a cost for the purpose of computing NPV.

based on the above, CFs are constructed.    NPV for the cash flows at discount rate of 12% is computed

     

excel formulas are

jeff jeffy answered 2 years ago
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