In: Finance
Sprint Bolt Ltd is a producer of specialised sport shoes. The company has been conducting research and development of a new model, where the lower mould can automatically adjust itself to avoid foot injury. The model has been tested and the managing board is happy to launch its production if it is financially viable.
The company has already spent $800,000 for research and development. The new model will have a five- year lifetime, after that the company will stop its production. The new production facilities and equipment will cost $22,000,000 which will be depreciated on a straight-line basis to zero book value. The company will not sell the equipment after the production of new product is finished.
The company expects to sell 80,000 pairs in the first year at $300 per pair. As the new technique can be potentially followed by competitors, every year the sale quantity is expected to decrease by 10% and the sale price will decrease by 8%. Variable costs are expected to be 40% of sales. While the new model generates a high gross profit rate, the company expects a high level of product returns of 5% on sales.
As a financial manager of the company, you’re conducting a capital budgeting analysis of the financial viability of the new model.
The company tax rate is 30%. Company’s required payback is 2 years and required rate of return is 25%. Assume that all cash flows are made at the end of each year.
Can someone please answers these questions? Its something very urgent.
To calculate the incremental Cash flows, we need Cash Flow after taxes.
The formula we have used:
EBT= Sales - sales return - Variable cost - Depreciation
EAT = EBT - tax
CFAT= EAT+ Depreciation
After that we will find the cumulative cash flows or incremental cash flows