Question

The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds​ (1957 replicas). The necessary foundry equipment will cost a total of ​$3,900,000 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: 230, year two: 290, year three: 340, year four: 350, year five: 310

If the sales price is $29,000 per​ car, variable costs are $17,000 per​ car, and fixed costs are $1,400,000 ​annually, what is the annual operating cash flow if the tax rate is 30​%? The equipment is sold for salvage for $500,000 at the end of year five. Net working capital increases by $600,000 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.

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%

a) First, what is the annual operating cash flow of the project for year one? year 2? year 3? year 4? year 5?

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

c) Then what is the incremental cash flow of the project in year 0? year 1? year 2? year 3? year 4? year 5?

d) What is the IRR of the project?

Answer 1