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%

Project cash flow and NPV. The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds​ (1957 replicas). The necessary foundry equipment will cost a total of $4,200,000 and will be depreciated using a​five-year MACRS​ life, Projected sales in annual units for the next five years are 300 per year. If the sales price is $ 27,000 per​ car, variable costs are ​$18,000 per​ car, and fixed costs are ​$1,300,000 ​annually, what is the annual operating cash flow if the tax rate is 30​%? The equipment is sold for salvage for ​$525,000 at the end of year five. What is the​ after-tax cash flow of the​ salvage? Net working capital increases by ​$550,000 at the beginning of the project​ (year 0) and is reduced back to its original level in the final year. What is the incremental cash flow of the​ project? Using a discount rate of 12% for the​ project, determine whether the project should be accepted or rejected according to the NPV decision model.

First, what is the annual operating cash flow of the project for year​ 1? ​$________ ​(Round to the nearest​ dollar.)

What is the annual operating cash flow of the project for year​ 2? ​$_________ ​(Round to the nearest​ dollar.)

What is the annual operating cash flow of the project for year​ 3? ​$___________ ​(Round to the nearest​ dollar.)

What is the annual operating cash flow of the project for year​ 4? ​$________ ​(Round to the nearest​ dollar.)

What is the annual operating cash flow of the project for year​ 5? ​$_________​(Round to the nearest​ dollar.)

​Next, what is the​ after-tax cash flow of the equipment at​ disposal? ​$________​(Round to the nearest​ dollar.)

​So, what is the incremental cash flow of the project in year​ 0? $________​(Round to the nearest​ dollar.)

What is the incremental cash flow of the project in year​ 1? ​$__________​(Round to the nearest​ dollar.)

What is the incremental cash flow of the project in year​ 2? $_________​ (Round to the nearest​ dollar.)

What is the incremental cash flow of the project in year​ 3? ​$________ (Round to the nearest​ dollar.)

What is the incremental cash flow of the project in year​ 4? ​$________ ​(Round to the nearest​ dollar.)

What is the incremental cash flow of the project in year​ 5? ​$________ ​(Round to the nearest​ dollar.)

​Finally, what is the NPV of the​ project? ​$________ (Round to the nearest​ dollar.)

Should the project be accepted or​ rejected? (Select the best​ response.)

A.The project should be accepted because the NPV is greater than zero.

B.The project should be rejected because the NPV is less than zero.

Answer 1

	0	1	2	3	4	5
Sales [300*$27000]		$ 81,00,000	$    81,00,000	$ 81,00,000	$     81,00,000	$        81,00,000
Variable cost [300*$18000]		$ 54,00,000	$    54,00,000	$ 54,00,000	$     54,00,000	$        54,00,000
Fixed cost		$ 13,00,000	$    13,00,000	$ 13,00,000	$     13,00,000	$        13,00,000
Depreciation		$     8,40,000	$    13,44,000	$     8,06,400	$        4,83,840	$          4,83,840
NOI		$     5,60,000	$          56,000	$     5,93,600	$        9,16,160	$          9,16,160
Tax at 30%		$     1,68,000	$          16,800	$     1,78,080	$        2,74,848	$          2,74,848
NOPAT		$     3,92,000	$          39,200	$     4,15,520	$        6,41,312	$          6,41,312
Add: Depreciation		$     8,40,000	$    13,44,000	$     8,06,400	$        4,83,840	$          4,83,840
OCF		$ 12,32,000	$    13,83,200	$ 12,21,920	$     11,25,152	$        11,25,152
Initial investment	$       42,00,000
Change in NWC	$         5,50,000					$        -5,50,000
Salvage value of equipment at EOY 5						$          5,25,000
Tax on gain = 30%*(525000-241920) =						$              84,924
After tax cash flow of the equipment at disposal						$          4,40,076
Incfemental cash flow	$     -47,50,000	$ 12,32,000	$    13,83,200	$ 12,21,920	$     11,25,152	$        21,15,228
Incfemental cash flow	$     -47,50,000	$ 12,32,000	$    13,83,200	$ 12,21,920	$     11,25,152	$        21,15,228
PVIF at 12.00% [PVIF = 1/1.1052^n]	1	0.89286	0.79719	0.71178	0.63552	0.56743
PV at 12.00%	$     -47,50,000	$ 11,00,000	$    11,02,679	$     8,69,739	$        7,15,054	$        12,00,237
NPV	$         2,37,709
A.The project should be accepted because the NPV is greater than zero.