This project involves a new type of widget. We think we can sell 6,000 units of...

Fixed costs for the project $450,000 per year and we will need to invest a total of $1,200,000 in manufacturing equipment. The equipment will be depreciated using MACRS over 7 years. In year four, the equipment will be worth half of what we paid for it.

We will invest $1,150,000 in net working capital at the start. After that, net working capital requirements will be 25% of sales. Assume a 34% tax rate.

Year MACRS Percentage

Year 1 14.29%
Year 2 24.49%
Year 3 17.49%
Year 4 12.49%

Should we undertake this project?

Prepare a pro forma income statement for each year. Then calculate OCF. Draw this on a timeline. Then calculate NPV assuming a 28% required return.

Solutions

Expert Solution

	0	1	2	3	4
MACRS %		14.29%	24.49%	17.49%	12.49%	31.24%
Investment	-1,200,000					374,880
NWC	-1,150,000	-275,000			1,425,000
Salvage					600,000
Sales		5,700,000	5,700,000	5,700,000	5,700,000
VC		-2,400,000	-2,400,000	-2,400,000	-2,400,000
FC		-450,000	-450,000	-450,000	-450,000
Depreciation		-171,480	-293,880	-209,880	-149,880
EBT		2,678,520	2,556,120	2,640,120	2,700,120
Tax (34%)		-910,697	-869,081	-897,641	-918,041
Net Income		1,767,823	1,687,039	1,742,479	1,782,079
OCF	-2,350,000	1,664,303	1,980,919	1,952,359	3,880,418
NPV	$2,535,819.92

Depreciation = Investment x MACRS %

Book Value of the asset after 4 years, BV = (1 - total MACRS%) x Investment

Cash Flows = Investment + NWC + (Salvage - BV) x (-tax rate) + Salvage + Net Income + Depreciation

NPV can be calculated using the same function in excel or calculator using 28% discount rate.

jeff jeffy answered 1 year ago

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