Question

PlumYum Inc, a dried fruit producer in Massachusetts is investigating the feasibility introducing a new product: dried strawberry! The company has given you, the financial adviser for the company, the following information:   

• The estimated unit sales are 15000 packs in the first year, and 25000 packs in the second year.
• The project will end at the end of the second year.
• Each package will sell for $15 in the first year. When the competition catches up after two years, you anticipate that the price will drop to $12 for the second year.     
• The variable cost per unit is $4, and total fixed costs are $8,000 per year.   
• The equipment required to begin production is $300,000 and qualifies as seven-year MACRS property with depreciation rate of 14.29% in the first year, 24.49% in the second year, and 17.49% in the third year.     
• The equipment will be worth about 75 percent of its cost in three years and the relevant tax rate is 15 percent.
• The project will require $25,000 in net working capital at the start. Subsequently, total net working capital at the end of each year will be about 20 percent of sales for that year.

1. Find the book value of the fixed asset at the end of year 2.

2. What is the after-tax salvage value of the fixed asset at the end of the project?

3. What is the Operating Cash Flow in year 2?

4. What is the cash flow from changes in Net Working Capital in year 2, including those resulting from liquidating the NWC at the end of the project?

Answer 1