Question

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A firm is considering a project with the following information: Project will require purchase of a...

A firm is considering a project with the following information:

Project will require purchase of a machine for $92,101.00 that is MACRS depreciable over a five-year schedule. (no depreciation until end of year 1).
Project will require immediate non-depreciable expenses of $25,021.00 TODAY (year 0).
Project will have the following projected balance sheet values of NWC:

YEAR	0	1	2
NWC Level	$4,000	9.00% of sales	8.00% of sales

Sales for the project will be $54,556.00 per year, with all other expenses (excluding depreciation) at 55.00% of sales.
The tax rate for the firm is 34.00%, while the cost of capital is 10.00%

*assume project goes beyond two years

-What is the project cash flow for year 0?

-What is the project’s cash flow for year 1?

Expert Solution

Calculation of Cash flow for year 0 :-

Particulars	Amount
Cost of machine	$92,101
Add- Non - depreciable expense	$25,021
Add- Increase in working capital	$4,000
Initial investment at year 0 for project	$121,122

Calculation of cash flows for year 1 :-

using MACR depreciation table 5-years table rate is 20%,32%,19.2%,11.52%,11.52%,5.76% for year 1,2,3,4,5,6 respectivily.

Year 1 depreciation = Cost of machine * MACR rate for year 1 = $ 92,101 * 20% = $ 18,420.2

Increase in working

Year 0 working capital = $ 4000

Year 1 working capital = 9% of sales = $ 54,556 * 9% = $ 4,910.04

Increase in working capital for year 1 = year 1 working capital - year 0 working capital = $ 4,910.04 - 4000 = $ 910.04

Sales	$54,556
Less- Cost @55%	$30,005.80
Less- Depreciation	18,420.20
Profit before tax	$6,130.00
Less- Tax@34%	$2,084.20
Profit after tax	$4,045.80
Add-Depreciation	18,420.20
Less- Increase in working capital	$910.04
Free cash flows for year 1	$21,555.96

Free cash flows for year 1 = $ 21,555.6 = $ 21,556 (approx)

jeff jeffy answered 1 year ago

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