Question

McCormick & Company is considering a project that requires an initial investment of $24 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The new plant will be built on some of the company's land, which has a current, after-tax market value of $4.3 million. The company will produce bulk units at a cost of $130 each and will sell them for $420 each. There are annual fixed costs of $500,000. Unit sales are expected to be $150,000 each year for the next six years, at which time the project will be abandoned. At that time, the plant and equipment is expected to be worth $8 million (before tax) and the land is expected to be worth $5.4 million (after tax). To supplement the production process, the company will need to purchase $1 million worth of inventory. That inventory will be depleted during the final year of the project. The company has $100 million of debt outstanding with a yield to maturity of 8 percent, and has $150 million of equity outstanding with a beta of 0.9. The expected market return is 13 percent, and the risk-free rate is 5 percent. The company's marginal tax rate is 40 percent. question: 6. Create an after-tax cash flow timeline. please show formula used

Answer 1

net cash from sale of land in year 6 = $5.4 million - ($5.4 million - $4.3 million) * (40%) = $4,960,000

accumulated depreciation on plant upto end of year 6 = $20,786,400

book value of plant at end of year 6 = $24 million - $20,786,400 = $3,213,600

sale price of plant at end of year 6 = $8 million

net cash from sale of plant = $8 million - ($8 million - $3,213,600)*(40%) = $6,085,440

net cash flow in each year = income after taxes + depreciation