A company will sell Widgets to consumers at a price of $85 per unit. The variable...

A company will sell Widgets to consumers at a price of $85 per unit. The variable cost to produce Widgets is $23 per unit. The company expects to sell 15,000 Widgets to consumers each year. The fixed costs incurred each year will be $110,000. There is an initial investment to produce the goods of $2,900,000 which will be depreciated straight line over the 13 year life of the investment to a salvage value of $0. The opportunity cost of capital is 10% and the tax rate is 31%.

a) What is operating cash flow each year? answer 634953.85

b) Using the an annual operating cash flow of $634,953.85, what is the net present value of this investment?

Should the company accept or reject this project?

I know how to do part a but i dont know how to do part b, can u provide steps please

Expert Solution

Dear sir/ma'am,

The answer for the above question is:

(a)

Particulars	Per unit	Units	Value
Sales	85	15,000	12,75,000
Fixed cost			1,10,000
Variable cost	23	15,000	3,45,000
			8,20,000
Depreciation			2,23,077
			5,96,923
Tax			1,85,046
Net of tax			4,11,877
Add back depreciation			2,23,077
Annual operating cash flow			6,34,954

(b)

	A	B		*(AB)**
Year	Annual Operating cashflow	Discount factor	Pv formula	Discounted Operating cash flow	Cummulative factor
1	6,34,954	1.000	1/1.1	6,34,954	6,34,954
2	6,34,954	0.909	1/(1+.10)*2	5,77,173	12,12,127
3	6,34,954	0.826	1/(1+.10)*3	5,24,472	17,36,599
4	6,34,954	0.751	1/(1+.10)*4	4,76,850	22,13,449
5	6,34,954	0.683	1/(1+.10)*5	4,33,673	26,47,123
6	6,34,954	0.621	1/(1+.10)*6	3,94,306	30,41,429	Iniatial investment has been recovered
7	6,34,954	0.564	1/(1+.10)*7	3,58,114	33,99,543
8	6,34,954	0.513	1/(1+.10)*8	3,25,731	37,25,274
9	6,34,954	0.466	1/(1+.10)*9	2,95,888	40,21,163
10	6,34,954	0.425	1/(1+.10)*10	2,69,855	42,91,018
11	6,34,954	0.385	1/(1+.10)*11	2,44,457	45,35,475
12	6,34,954	0.350	1/(1+.10)*12	2,22,234	47,57,709
13	6,34,954	0.319	1/(1+.10)*13	2,02,550	49,60,259
			Total	49,60,259

The company can accept the Project, Since the initial investment has been during 6th year itself..It is good to invest in this Project!!!

ekkarill92 answered 10 months ago

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