Question

Use the following information to calculate:

A) Annual Cash Flows for years 1-6;

B) the Initial Outlay;

C) Depreciable Base;

D) Depreciation Expense;

E) Proceeds from Sale of Equipment (aka Cash Flow from Sale);

F) the CF Total from the Terminal Year 6;

G) the Net Present Value (NPV) of the Cash Flows for years 1-6; and H) the IRR (Internal Rate of Return) The answers to this question should be listed from A to H, with their corresponding values in dollars. For example, A: Year 1 = $5,000,000.00, Year 2 = $2,000,000.00, and so on; B = $30,000.00, etc.

Year	Units Sold
1	65,000
2	93,000
3	120,000
4	110,000
5	83,000
6	50,000

• Price per Unit: $260.00
• Variable Cost: $125.00
• Fixed Costs: $255,000.00
• Taxes: 36%
• Cost of Equipment: $33,200,000.00
• Shipping and Installation Costs: $1,000,000.00
• Working Capital: $150,000.00
• Salvage Value: $80,000.00
• Life of Equipment: 6 years.
• Sales Price: $30,000.00
• Required Return Rate (for NPV and IRR Calculation): 17%

For each year/period you will calculate an Income Statement using:

• Revenue
• Variable Cost
• Fixed Cost
• Depreciation Expense
• EBIT
• Taxes
• Net Income
• Annual Cash Flow

Answer 1

Based on the given information, pls find below tables for the workings;

Assumption: For depreciation, Straight line method is assumed; Otherwise, MACRS 7 year table can also be applied, considering its an equipment.

Based on the above, with such high cost of capital of 17%, this Project doesnt seem feasible to invest in.

A) Annual Cash Flows for years 1-6; Year 1: $8,044,800, Year 2: $10,464,000, Year 3: $ 12,796,800, Year 4: $11,932,800, Year 5: 9,600,000, Year 6: 6,748,800, Terminal year: $19200.

B) the Initial Outlay; $ 43,350,000 (Equipment $33,200,000 + Installation $10,00,000 + Working Capital $ 150,000

C) Depreciable Base: For depreciation, Straight line method is assumed; Otherwise, MACRS 7 year table can also be applied, considering its an equipment.

D) Depreciation Expense: $ 7,200,000 per year from Year 1 till Year 6. ($43,200,000 / 6)

E) Proceeds from Sale of Equipment (aka Cash Flow from Sale); $ 30000 pre tax and $ 19200 post tax;

F) the CF Total from the Terminal Year 6: $19200 (Have assumed that the initial working capital is consumed through out the period of the proejct and nothing left out at terminal year);

G) the Net Present Value (NPV) of the Cash Flows for years 1-6: Year 1: $6,875,897, Year 2: $7,644,094 , Year 3: $ 7,989,945, Year 4: $6,367,939, Year 5: 4,378,667, Year 6: 2,630,943, Terminal year: $6,397.

H) the IRR (Internal Rate of Return) :10.1%

Computations:

Computation of IRR: This can be computed using formula in Excel = IRR("range of cashflows", discounting factor%);

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;