A firm is considering adding a new product line. The plant that will be used for

Question

A firm is considering adding a new product line. The plant that will be used for production was purchased fifty years ago at a cost of $20,000. The project has three years life. It requires $144854 initial investment in equipment and $71.402 in other fixed assets. Straight-line depreciation is used and the fixed assets will be depreciated to zero. The expected salvage is zero in year three. The project requires an initial $40349 investment in net working capital. which will be recovered in year three. The estimated annual sales of the new product is $101.466 and annual costs is $45.560. The firm?s marginal tax rate is 39% and it requires an annual return of 0.13. What is the incremental cash flow in year 0?

Explanation / Answer

0 1 2 3 Intial Outlay $(216,256.00) Revenue $ 101,466.00 $ 101,466.00 $ 101,466.00 Cost $ (45,560.00) $ (45,560.00) $ (45,560.00) Residual Value $                 -   Working Capital $   (40,349.00) $   40,349.00 Total Cashflow $(256,605.00) $   55,906.00 $   55,906.00 $   96,255.00 Tax (39%) $ (21,803.34) $ (21,803.34) $ (37,539.45) Tax Allowance $     9,282.26 $     9,282.26 $     9,282.26 Net Cash Flow $(256,605.00) $   43,384.92 $   43,384.92 $   67,997.81 Dicounted Rate (13%) 1 0.884955752 0.783146683 0.693050162 Present Value $(256,605.00) $   38,393.73 $   33,976.76 $   47,125.89

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