Question

My correct answers:

After tax salvage value 79000

cash flow at end of yr 1 was 788680

Please help with calculating:

a. Calculate the initial cash outflow (e.g. the time 0 cash flow).

b. Calculate the cash flow from assets at the end of year 6. ( I had -4900000 incorrect) and NPV (I had 23040210 which was incorrect)

Question statement:Fincal Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This calculator will sell for $120. The company feels that sales will be 13,000, 13,000, 14,000, 14,000, 15,000 and 12,500 units per year for the next 6 years. Variable costs will be 30% of sales, and fixed costs are $200,000 per year. The firm hired a marketing team to analyze the viability of the product and the marketing analysis cost $2,000,000. The company plans to use a vacant warehouse to manufacture and store the calculators. Based on a recent appraisal the warehouse and the property is worth $3 million on an after-tax basis. If the company does not sell the property today then it will sell the property 6 years from today at the currently appraised value. This project will require an injection of net working capital at the onset of the project in the amount of $500,000. This networking capital will be fully recovered at the end of the project. The firm will need to purchase some equipment in the amount of $2,400,000 to produce the new calculators. The machine has a 6-year life and will be depreciated using the straight-line method. At the end of the project, the anticipated market value of the machine is $100,000. The firm requires an 8% return on its investment and has a tax rate of 21%.

Answer 1

• Revenue is calculated by multiplyng the cost of the calculator ($120) by the expected number of sales for each year
• Variable cost is 30% of revenue
• Depreciation per year is 2,400,000/6 = 400,000 per year
• Tax is 21% of EBIT
• Net income is EBIT - Tax
• Net cashflow is Net income + any purchases/sales + depreciation
• The formula used for NPV is = NPV( 8%, C12 : H12) + B12
• The marketing analytics cost is a sunk cost and should not be included.