Question

Mathews Mining Company is looking at a project that has the following forecasted​ sales: ​ first-year sales are 6,800 ​units, and sales will grow at 15​%

over the next four years​ (a five-year​ project). The price of the product will start at $124.00 per unit and will increase each year at 5​%.

The production costs are expected to be 62​% of the current​ year's sales price. The manufacturing equipment to aid this project will have a total cost​ (including installation) of

​$1,400,000. It will be depreciated using​ MACRS

Year   3-Year   5-Year   7-Year   10-Year
1   33.33%   20.00%   14.29%   10.00%
2   44.45%   32.00%   24.49%   18.00%
3   14.81%   19.20%   17.49%   14.40%
4   7.41%   11.52%   12.49%   11.52%
5       11.52%   8.93%   9.22%
6       5.76%   8.93%   7.37%
7           8.93%   6.55%
8           4.45%   6.55%
9               6.55%
10               6.55%
11               3.28%

and has a​ seven-year MACRS life classification. Fixed costs will be ​$50,000 per year. Mathews Mining has a tax rate of

30%

What is the operating cash flow for this project over these five​ years? Find the NPV of the project for Mathews Mining if the manufacturing equipment can be sold for

​$80, 000 at the end of the​ five-year project and the cost of capital for this project is 12​%.

What are the operating cash flows for the project in years 1 through 5?

What is the​ after-tax cash flow of the project at​ disposal?

What is the NPV of the​ project?

Answer 1

The required Cash flows & NPV calculations are as shown below:

Formulas used:

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