Question

MACRS Fixed Annual Expense Percentages by Recovery Class         

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%

NPV. Mathews Mining Company is looking at a project that has the following forecasted​ sales: ​ first-year sales are 7,000 ​units, and sales will grow at 12​% over the next four years​ (a five-year​ project). The price of the product will start at $126.00 per unit and will increase each year at 66​%. The production costs are expected to be 63​% of the current​ year's sales price. The manufacturing equipment to aid this project will have a total cost​ (including installation) of $1,450,000. It will be depreciated using MACRS, and has a​ seven-year MACRS life classification. Fixed costs will be ​$55,000 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 14​%.

What is the operating cash flow for this project in year​ 1? ​$_______ (Round to the nearest​ dollar.)

What is the operating cash flow for this project in year​ 2? ​$________ ​(Round to the nearest​ dollar.)

What is the operating cash flow for this project in year​ 3? ​$_________ (Round to the nearest​ dollar.)

What is the operating cash flow for this project in year​ 4? ​$__________ (Round to the nearest​ dollar.)

What is the operating cash flow for this project in year​ 5? ​$__________ (Round to the nearest​ dollar.)

What is the​ after-tax cash flow of the project at​ disposal? ​$__________ ​(Round to the nearest​ dollar.)

What is the NPV of the​ project? ​$_________​(Round to the nearest​ dollar.)

Answer 1

Statement showing depreciation

Year	Opening balance	Depreciation rate	Depreciation = 1450000*Depreciation rates	Closing balance
1	1,450,000	14.29%	207205	1,242,795
2	1,242,795	24.49%	355105	887,690
3	887,690	17.49%	253605	634,085
4	634,085	12.49%	181105	452,980
5	452,980	8.93%	129485	323,495
6	323,495	8.92%	129340	194,155
7	194,155	8.93%	129485	64,670
8	64,670	4.46%	64670	0

Statement showing NPV

Particulars	0	1	2	3	4	5	NPV = Sum of PV
Cost of equipment	-1450000
Sales in unit		7000	7840	8781	9834	11015
Sales price per unit		126	209	347	576	957
Total sales		882000	1639814	3048743	5668223	10538360
Production cost @ 63% of sales		555660	1033083	1920708	3570980	6639167
Fixed cost		55000	55000	55000	55000	55000
Deprecition		207205	355105	253605	181105	129485
PBT		64135	196626	819430	1861137	3714708
Tax @ 30%		19241	58988	245829	558341	1114412
PAT		44895	137638	573601	1302796	2600296
Add: Deprecition		207205	355105	253605	181105	129485
Annual cash flow		252100	492743	827206	1483901	2729781
Salvage value = 80000+30%(323495-80000) =80000+30%(243495) =80000+73048.5 =153048.5						153049
Total cash flow	-1450000	252100	492743	827206	1483901	2882829
PVIF @ 14%	1	0.8772	0.7695	0.6750	0.5921	0.5194
PV = Total cash flow*PVIF	-1450000	221140	379150	558340	878589	1497251	2084470

Thus

Operating cash flow at year 1 =252100$

Operating cash flow at year 2 = 492743$

Operating cash flow at year 3 = 827206$

Operating cash flow at year 4=1483901$

Operating cash flow at year 5 = 2729781$

NPV = 2084470$