Greenhouse Corporation is considering a 3 years environment project. It has a la
ID: 2753114 • Letter: G
Question
Greenhouse Corporation is considering a 3 years environment project. It has a land available that can be sold for $1,000,000 after tax now or for $,200,000 after tax in 3 years. To start the project, Greenhouse Corporation needs $600,000 to purchase and install the necessary equipment on the land. The equipment is depreciated straight-line to a $0 book value in 4 years. At the end of the project, the equipment can be sold for an estimated value of $80,000. The project will generate annual sales of 20.000 units at a selling price of $25 each. The fixed costs are $5,000 and the variable costs per unit are $10. It also required $55,000 in net working capital for spare parts and accessories at the beginning. The environmental project is risky and investors require. What is the project's cash flow at time 0? What is the project's cash flow at the end of year 1?Explanation / Answer
The Corporation needs $600,000 for the project purchase and installation. It requires $55,000 for the Working in progress for spare parts and accesaries.
1. So, Cash flow at the time 0 = $600,000 + $55,000
= $655,000
2. Projects cash inflow at the end of year 1 :
Depreciation = (600,000-80,000 ) / 4 = $130.000
Sales = 20,000 * $25 = $500,000
Variable cost = 20.000 * $10 = $200,000
Cash inflow at the end of year 1= [($500,000 - 200,000 - 130,000) * 0.60 + $130,000] * 0.909 (i.e. PVIFA(10%,1))
= $232,000 * 0.909
= $210,888
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