Question

Project cash flow and NPV.  The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds​ (1957 replicas). The necessary foundry equipment will cost a total of ​$4 comma 200 comma 000 and will be depreciated using a​ five-year MACRS​ life, The sales manager has an estimate for the sale of the classic Thunderbirds. The annual sales volume will be as​ follows:

Year​ one:  250 Year​ four:  370 Year​ two:  270 Year​ five:  300 Year​ three:  350

If the sales price is ​$30 comma 000 per​ car, variable costs are ​$20 comma 000 per​ car, and fixed costs are ​$1 comma 300 comma 000 ​annually, what is the annual operating cash flow if the tax rate is 30​%? The equipment is sold for salvage for ​$500 comma 000 at the end of year five. Net working capital increases by ​$600 comma 000 at the beginning of the project​ (year 0) and is reduced back to its original level in the final year. Find the internal rate of return for the project using the incremental cash flows.

First, what is the annual operating cash flow of the project for each year from year 1 to year 5 ?

?Next, what is the? after-tax cash flow of the equipment at? disposal?

?Then, what is the incremental cash flow of the project in each fom year? 0 to year 5 ?

?So, what is the IRR of the? project?

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-4200000
Initial working capital		-600000
=Initial Investment outlay		-4800000
5 years MACR rate			20.00%	32.00%	19.20%	11.52%	11.52%	5.76%
Unit sales			250	270	350	370	300
Profits	=no. of units sold * (sales price - variable cost)		2500000	2700000	3500000	3700000	3000000
Fixed cost			-1E+06	-1300000	-1300000	-1300000	-1300000
-Depreciation	=Cost of machine*MACR%		-840000	-1344000	-806400	-483840	-483840	241920	=Salvage Value
=Pretax cash flows			360000	56000	1393600	1916160	1216160
-taxes	=(Pretax cash flows)*(1-tax)		252000	39200	975520	1341312	851312
+Depreciation			840000	1344000	806400	483840	483840
=a. after tax operating cash flow			1092000	1383200	1781920	1825152	1335152
reversal of working capital							600000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						350000
+Tax shield on salvage book value	=Salvage value * tax rate						72576	=422576	b. after tax cash flow of equipment
=Terminal year after tax cash flows							1022576
c. incremental Cash flow for the period		-4800000	1092000	1383200	1781920	1825152	2357728
Discount factor=	(1+discount rate)^corresponding period	1	1.1941	1.425875	1.7026376	2.0331197	2.4277484
Discounted CF=	Cashflow/discount factor	-4800000	914496	970071	1046564.5	897710.06	971158.29
NPV=	Sum of discounted CF=	4.83124E-08
d. IRR is discount rate at which NPV = 0 =	19.41%