Calida Company (CC) is considering a new project. In analyzing the new project t

Question

Calida Company (CC) is considering a new project. In analyzing the new project the financial manager of the company has collected the following information. The new project will require a capital expenditure of $5 million today. This expenditure will be used to purchase new equipment This equipment will be depreciated according to the following depreciation schedule: .If CC goes ahead with the new business, inventories will rise by $500,000 today, and its accounts payable will rise by $200,000 today. The new project is expected to have an economic life of four years. The new project is expected to generate sales of $3 million in the first year, $4 million in the second year, $5 million in the third year, and $2 million in the fourth year. Each year, operating costs excluding depreciation are expected to be 75 percent of sales. .The company's marginal tax rate is 40 percent. .The company's WACC is 10 percent. .The company is very profitable, so any accounting losses on this project can be used to reduce the company's overall tax burden

Explanation / Answer

Cost of new Project      5,000,000.00 NWC          300,000.00 Cash Outflow      5,300,000.00 Tax                       0.40 WACC                       0.10 Depriciation according to MACRS                                                   1                             2                           3                           4 33% 45% 15% 7% Years                                                   1                             2                           3                           4 Sales                             3,000,000.00      4,000,000.00    5,000,000.00    2,000,000.00 Cost                             2,250,000.00      3,000,000.00    3,750,000.00    1,500,000.00 EBIDTA                                750,000.00      1,000,000.00    1,250,000.00        500,000.00 EBIDTA*(1-T)                                450,000.00          600,000.00        750,000.00        300,000.00 Depriciation according to MACRS                             1,650,000.00      2,250,000.00        750,000.00        350,000.00 DT                                660,000.00          900,000.00        300,000.00        140,000.00 Cash Flows                             1,110,000.00      1,500,000.00    1,050,000.00        440,000.00 PV of cash flow                             1,009,090.91      1,239,669.42        788,880.54        300,525.92 BV                         -   SV                         -   Return of NWC          30,000.00 PV Return of NWC          20,490.40 Total after tax cash flow (5,300,000.00)                             1,009,090.91      1,239,669.42        788,880.54        321,016.32 NPV (1,941,342.80) Since NPV is -ve should not take the project

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