A company is evaluating a proposed 4-year project. The depreciable cost will inc

Question

A company is evaluating a proposed 4-year project. The depreciable cost will include the following: $300,000 for the equipment, $20,000 for shipping, and $30,000 for installation. The depreciation life is under the MACRS 3-year class, with a salvage value of $45,000. The inventories will rise by $18,000 and accounts payable will rise by $3,000. In addition, the new sales are estimated to be 150,000 units per year at $2.25 per unit. There is a variable operating cost that is 60% of sales and the company

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Net operating cash flow for the initial year (Year 0) = Equipment Cost + Shipping + Installation + Increase in working capital= 300000 + 20000 + 30000 + 15000= 365000

Part B:

Thanks.

Year 1 Year 2 Year 3 Sales 337500 337500 337500 Less Variable Costs 202500 202500 202500 Less Depreciation 116655 155575 51835 EBT 18345 -20575 83165 Less Tax 6421 -7201 29108 OCF 11924 -13374 54057 Add Depreciation 116655 155575 51835 Net Operating Cash Flow 128579 142201 105892

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