Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

you are an analyst with smith securities. one of the companies that you follow i

ID: 2668504 • Letter: Y

Question

you are an analyst with smith securities. one of the companies that you follow is Mac Company. Mac Company is considering the purchase of a new 400-ton stamping press. The press cost $500,000. The press will depreciate straight-line to $100,000 over a five-year life. The project will generate $250,000 in revenue and $150,000 in costs. The press will be sold for $150,000 after five year. An inventory investment of $60,000 is required during the life of the investment. Mac is in the 40 precent tax bracket. The cost of capital is 5%.

1: what is Mac's net investment outlay?
2: What is Mac's annual after-tax operating cash flow?
3: What is the terminal year's after-tax non-operating cash flow at the end of year 5?
4: What is the NPV?
5: inest or not?

Explanation / Answer

Press Cost = $500,000

Annual Depreciation = $100,000

Annual revenue = $250,000

Annual costs = $150,000

Selling value of Press after 5 years = $150,000

(1)   What is Mac’s net investment outlay?

Net Investment Outlay = [$500,000 + $60,000]

Net Investment Outlay = $560,000

(2)   What is Mac’s annual after-tax operating cash flow?

Operating Cash flow = Operating income + Depreciation

Operating Income = Gross Profit – Operating expenses

Gross Profit = [Annual Revenue – Costs]

Gross Profit = [$250,000 - $150,000]

Gross Profit = $100,000

Operating Income = [$100,000 - $0]

Operating Income = $100,000

After-tax Operating Income = [$100,000 – (0.40 * $100,000)]

After-tax Operating Income = [$100,000 - $40,000]

After-tax Operating Income = $60,000

After-tax Operating Cash flow = [$60,000 + $100,000]

After-tax Operating Cash flow = $160,000

(4) What is the NPV?

Year

Cash flows

PV Factor at 5%

Net Present Value

0

($560,000)

1

($560,000)

1

$160,000

0.9524

$152,384

2

$160,000

0.907

$145,120

3

$160,000

0.8638

$138,208

4

$160,000

0.8227

$131,632

5

$160,000

0.7835

$125,360

6

$150,000

0.7462

$111,930

Net Present Value

$244,634

Net Present Value = $244,634

Year

Cash flows

PV Factor at 5%

Net Present Value

0

($560,000)

1

($560,000)

1

$160,000

0.9524

$152,384

2

$160,000

0.907

$145,120

3

$160,000

0.8638

$138,208

4

$160,000

0.8227

$131,632

5

$160,000

0.7835

$125,360

6

$150,000

0.7462

$111,930

Net Present Value

$244,634