In: Finance
16-Large Manufacturing, Inc. is considering investing in some new equipment whose data are shown below. The equipment has a 3-year class life and will be depreciated by the MACRS depreciation system, and it will have a positive pre-tax salvage value at the end of Year 3, when the project will be closed down. Also, some new working capital will be required, but it will be recovered at the end of the project's life. Revenues and cash operating costs are expected to be constant over the project's 3-year life. What is the project's Initial Cash Outlay at time 0? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box. WACC 11.0%
Net investment in fixed assets (depreciable basis) $70,000
Required new working capital $10,000
Sales revenues, each year $95,000
Cash operating costs excl. depr'n, each year $30,000
Expected pretax salvage value $9,000
Tax rate 30.0%
18-Using the information from problem 16 on Large Manufacturing, Inc., what is the
Terminal Year Non–Operating Cash Flow at the end of Year 3? Enter your answer
rounded to two decimal places. Do not enter $ or comma in the answer box. For
example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.
19-Using the information from problem 16 on Large Manufacturing, Inc., what is the
project’s NPV? Enter your answer rounded to two decimal places. Do not enter $ or
comma in the answer box. For example, if your answer is $12,300.456 then enter as
12300.46 in the answer box.
Time line | 0 | 1 | 2 | 3 | ||
Cost of new machine | -70000 | |||||
Initial working capital | -10000 | |||||
=Initial Investment outlay | -80000 | |||||
3 years MACR rate | 33.33% | 44.45% | 14.81% | 7.41% | ||
Sales | 95000 | 95000 | 95000 | |||
Profits | Sales-variable cost | 65000 | 65000 | 65000 | ||
-Depreciation | =Cost of machine*MACR% | -23331 | -31115 | -10367 | 5187 | |
=Pretax cash flows | 41669 | 33885 | 54633 | |||
-taxes | =(Pretax cash flows)*(1-tax) | 29168.3 | 23719.5 | 38243.1 | ||
+Depreciation | 23331 | 31115 | 10367 | |||
=after tax operating cash flow | 52499.3 | 54834.5 | 48610.1 | |||
reversal of working capital | 10000 | |||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 6300 | ||||
+Tax shield on salvage book value | =Salvage value * tax rate | 1556.1 | ||||
=18. Terminal year after tax cash flows | 17856.1 | |||||
Total Cash flow for the period | -80000 | 52499.3 | 54834.5 | 66466.2 | ||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.11 | 1.2321 | 1.367631 | |
Discounted CF= | Cashflow/discount factor | -80000 | 47296.66667 | 44504.91 | 48599.513 | |
19. NPV= | Sum of discounted CF= | 60401.09 |