Your firm is considering an overseas expansion. Below is the information that yo

Question

Your firm is considering an overseas expansion. Below is the information that you have been given regarding the project: Initial Equipment Cost: $100m. Life of System: 5 years. Depreciation method: Straight line Depreciation. Expected overseas sales: $130m per year. Raw materials: $75m per year. Salaries for new workers: $25m per year. Net Working Capital necessary for plant to operate effectively: $25m (assume that this investment is required at the start of the project and is recovered when the plant shuts down after 5 years.) Marginal Tax Rate on income and capital gains: 40% Expected salvage value of equipment after 5 years: $30m. What will be the cash flows of this project in millions?

a. -125/26.5/26.5/26.5/26.5/71

b. -100/26.5/26.5/26.5/26.5/81.5

c. -125/26/26/26/26/69

d. -125/32/32/32/32/75

e. -100/9.1/9.1/9.1/9.1/28.6

Explanation / Answer

Year Cost of equipment Sales Raw material Salaries Depreciation Profit Tax After tax profit Profit + Depreciation working capital Salvage value Cashflow 0 -100 -25 -100 1 130 -75 -25 14 16 6.4 9.6 23.6 26.5 2 130 -75 -25 14 16 6.4 9.6 23.6 26.5 3 130 -75 -25 14 16 6.4 9.6 23.6 26.5 4 130 -75 -25 14 16 6.4 9.6 23.6 26.5 5 130 -75 -25 14 16 6.4 9.6 23.6 25 30 71

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