Question

Fool Proof Software is considering an expansion project having life for four years. The proposed project has the following features:

• Initial cost of the equipment is $200,000, with shipping cost $10,000 and installation cost of $30,000.
• The equipment will depreciate over 4 years using MACRS at the following rates (33%, 45%, 15%, and 7%) respectively.
• Inventories will increase by $25,000, and accounts payable will rise by $5,000
• The company will sell 100,000 units per year with a price of $2/unit. The company’s total operating cost will
equal $120,000 each year.
• At t=4, the project salvage valve is $25,000.
• The company’s tax rate is 40%.
• The project’s WACC is 10%.

1. Calculate the Net Working Capital (NWC) value *

$20,000

$30,000

$25,000

$5,000

Based on the company’s information, the fixed capital investment(Depreciable Basis) is *

$200,000

$230,000

$210,000

$240,000

3. Calculate initial investment value *

$240,000

$260,000

$200,000

$230,000

4. Calculate depreciation for 1st year *

$79,200

$70,000

$76,400

$65,000

5. Calculate depreciation for 2nd year *

$120,000

$100,000

$96,000

$108,000

6. Calculate depreciation for 3rd year *

$36,000

$96,000

$65,000

$48,000

7. Calculate depreciation for 4th year *

$14,000

$16,800

$20,000

$16,000

Fool Proof Software is considering an expansion project having life for four years. The proposed project has the following features:

• Initial cost of the equipment is $200,000, with shipping cost $10,000 and installation cost of $30,000.
• The equipment will depreciate over 4 years using MACRS at the following rates (33%, 45%, 15%, and 7%) respectively.
• Inventories will increase by $25,000, and accounts payable will rise by $5,000
• The company will sell 100,000 units per year with a price of $2/unit. The company’s total operating cost will
equal $120,000 each year.
• At t=4, the project salvage valve is $25,000.
• The company’s tax rate is 40%.
• The project’s WACC is 10%.

1. Calculate the Net Working Capital (NWC) value *

$20,000

$30,000

$25,000

$5,000

Based on the company’s information, the fixed capital investment(Depreciable Basis) is *

$200,000

$230,000

$210,000

$240,000

3. Calculate initial investment value *

$240,000

$260,000

$200,000

$230,000

4. Calculate depreciation for 1st year *

$79,200

$70,000

$76,400

$65,000

5. Calculate depreciation for 2nd year *

$120,000

$100,000

$96,000

$108,000

6. Calculate depreciation for 3rd year *

$36,000

$96,000

$65,000

$48,000

7. Calculate depreciation for 4th year *

$14,000

$16,800

$20,000Fool Proof Software is considering an expansion project having life for four years. The proposed project has the following features:

• Initial cost of the equipment is $200,000, with shipping cost $10,000 and installation cost of $30,000.
• The equipment will depreciate over 4 years using MACRS at the following rates (33%, 45%, 15%, and 7%) respectively.
• Inventories will increase by $25,000, and accounts payable will rise by $5,000
• The company will sell 100,000 units per year with a price of $2/unit. The company’s total operating cost will
equal $120,000 each year.
• At t=4, the project salvage valve is $25,000.
• The company’s tax rate is 40%.
• The project’s WACC is 10%.

1. Calculate the Net Working Capital (NWC) value *

$20,000

$30,000

$25,000

$5,000

Based on the company’s information, the fixed capital investment(Depreciable Basis) is *

$200,000

$230,000

$210,000

$240,000

3. Calculate initial investment value *

$240,000

$260,000

$200,000

$230,000

4. Calculate depreciation for 1st year *

$79,200

$70,000

$76,400

$65,000

5. Calculate depreciation for 2nd year *

$120,000

$100,000

$96,000

$108,000

6. Calculate depreciation for 3rd year *

$36,000

$96,000

$65,000

$48,000

7. Calculate depreciation for 4th year *

$14,000

$16,800

$20,000

$16,000

8. Calculate the net operating cash flow after tax for 1st year *

$79,000
$79680
$80000
$75430

Answer 1

1)Net working capital =Increase in inventory-increase in payables

Increase in inventory =$30,000 Increase in payables =$5,000 Net working capital =$25,000-$5,000 =$20,000

2)Fixed capital investment (depreciable basis)

Depreciable basis =purchase Price +Installation + Shipping cost

Purchase price =$200,000 installation =$30,000 Shipping Cost =$10,000

Depreciable basis =$200,000+$30,000+$10,000=$240,000

3)Initial investment Value=Purchase price +installation +Shipping cost +Net Working capital

Purachase price =$200,000 Installation cost =$30,000 Shipping cost =$10,000 Net Working capital =$20,000

initial investment =$200,000+$30,000+$10,000+$20,000=$260,000

4)Depreciation for first Year

$240,000*33%=$79,200

5)Depreciation for second year =$240,000*45%=$108,000

6)Depreciation for 3rd year =$240,000*15%=$36,000

7)Depreciation for 4 th year =$240,000*7%=$16,800

8)Net operating cashflow after tax for year 1 =Change in revenue +/-change in cost +/-tax depreciation +/-tax +/-tax depreciation

Revenue =100,000*$2=$200,000 Cost =$120,000

Net operating cashflow after tax for year 1=$200,000-$120,000-$79,200=$800 Less tax @40% =$320 we get net effect after tax =$480 Add back atx depreciation =$79,200 Net Operating cashflow after tax after 1 year =$79680