Question

Suppose that Calloway golf would like to capitalize on Phil Michelson winning the Open Championship in 2013 by releasing a new putter. The new product will require new equipment for $414,452.00 that will be depreciated using the 5-year MACRS schedule. The project will run for 2 years with the following forecasted numbers:

	Year 1	Year 2
Putter price	$62.01	$62.01
Units sold	18,933.00	10,513.00
COGS	41.00% of sales	41.00% of sales
Selling and Administrative	18.00% of sales	18.00% of sales

Calloway has a 13.00% cost of capital and a 40.00% tax rate. The firm expects to sell the equipment after 2 years for a NSV of $148,000.00.

What is the project cash flow for year 2? (include the terminal cash flow here)

Answer Format: Currency: Round to: 2 decimal places.

Answer 1

Depreciation rates for 1 year and 2 year under 5 year macrs is 20% and 32%
Calculation of tax benefit
Cost of asset		414,452.00
2 year Depreciation provided(414452*52%) =		-215,515.04
		-------------------------
Book value		198,936.96
Sale value		148,000.00
Sale value is less than book value. So Capital loss = Sale Value - book value=		-50,936.96
tax benefit on capital loss (@ 40% of 50936.96)=		-20,374.78
Calculation of after tax salvage value
Sale proceeds from equipment		148,000.00
Add : Tax benefit on capital loss of sale of asset		20,374.78
		-------------------------
So, After tax cash flow from sale =		168,374.78

Calculation of cash flow in year 2
Sales (10513 *62.01)=	651911.13
Less : COGS (41% of sales)	-267283.56
Less : Selling & Adm. exp. (18% of sales)	-117344.00
Less : Depreciation @ 32% of 414452	-132624.64
___________________________
Profit before tax	134658.92
Less : Tax @ 40%	-53863.57
___________________________
Profit after tax	80795.35
Add : Depreciation	132624.64
(as non cash item considered only for tax calculation)
___________________________
Cash flow (excluding terminal inflow)	213419.99
Terminal inflow	168,374.78
___________________________
Cash flow in year 2	381794.78
So, cash flow in year 2 is $381794.78.