Expected unit sales of a project are as follows. Year 1 2 3 4 5 Units 100,000 11
ID: 2649098 • Letter: E
Question
Expected unit sales of a project are as follows.
Year
1
2
3
4
5
Units
100,000
110,000
130,000
150,000
65,000
The forecasted sale price is $160 per unit. The project will require $1,000,000 in net working capital to start and total net working capital will rise to 40% of sales. The variable cost per unit is $120, and total fixed costs are $50,000 per year. The equipment necessary to begin production will cost a total of $10,000,000. The CCA rate is 20%. In five years the market value of the equipment is forecasted to be the same as the ending UCC of the fifth year. The relevant tax rate is 45%, and the required rate of return is 18%.
(a) Create a table of beginning UCC, CCA Depreciation and Ending UCC for year 1 to 5.
(b) Create the Pro-Forma Income Statements for Year 1 to 5.
(c) Use the
Explanation / Answer
Given selling price =$160
Variable costs=$120
Conribution =$160 -$120 =$40
Answer for Subpoint a:
Answer for subpoint b:
Answer for subpoint c:
In the last year of the project entire working capital is ploughed back so, the last year cash flows are as follows:
Cash inflows as computed in (G) above + decrease in working capital as computed in (B) in the below table + net working capital of year 5
=$1,771,140+$9,600,000+$4,160,000
=$15,531,140
Net present value = Present value of cash inflows - Present value of cash outflows
=Cas inflow in year 5 also should include present value of salvage value of the equipment =$3,276,800 *0.437109216 =$1,432,319
Therefore, present value of cash inflows after considereing salvage value =total of discounted cash inflows as computed in the above table.
=$8,305,455.84+$1,432,319
=$9,737,775.32
NPV = $9,737,775.32-$10,000,000
= - $262,224.68
NPV has a negative value.
Year Rate of depreciation Depreciation Value of asset after Current year depreciation 1 20.00% $2,000,000.00 $8,000,000.00 2 20.00% $1,600,000.00 $6,400,000.00 3 20.00% $1,280,000.00 $5,120,000.00 4 20.00% $1,024,000.00 $4,096,000.00 5 20.00% $819,200.00 $3,276,800.00Related Questions
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