QUESTION 16 A company is considering a 5-year project to open a new product line

Question

QUESTION 16

A company is considering a 5-year project to open a new product line. A new machine with an installed cost of $90,000 would be required to manufacture their new product, which is estimated to produce sales of $60,000 in new revenues each year. The cost of goods sold to produce these sales (not including depreciation) is estimated at 53% of sales, and the tax rate at this firm is 26%. If straight-line depreciation is used to calculate annual depreciation, what is the estimated annual operating cash flow from this project each year? (Answer to the nearest dollar.)

QUESTION 18

A company is considering a 3-year project that requires an initial installed equipment cost of $17,000. The project engineer has estimated that the operating cash flows will be $3,000 in year 1, $6,000 in year 2, and $9,000 in year 3. The new machine will also require a parts inventory of $2,000 at the beginning of the project (assume this inventory can be sold for cost at the end of the project). It is also estimated that the equipment can be sold as salvage for an after tax salvage cash flow of $5,000 at the end of the project. If the tax rate is 25% and the required rate of return is 15%, what is the net present value (NPV) of this project? (Answer to the nearest dollar.)

Explanation / Answer

QUESTION 16

Revenue                   =                                  $60,000

Less:   Expense                    = $31,800                                         

Depreciation             = $18,000 $49,800                     

Pre tax income         =                                  $10,200

Tax 26%                     = $2,652

Net Income                = $7,548        

Add:   Depreciation              =   $18,000         

Net cash flow            = $25,548

Estimated annual operating cash flow from this project each year = $25,548

QUESTION 18

Year 0                    1                     2                       3       

Operating cash flow                                   $3,000             $6,000          $9,000

Initial equipment cost - $17,000

Inventory - $2,000

Sale of equipment $3,750 Note 1

Sale of Inventory $1,500 Note 2

Net cash flow - $19,000        $3,000            $6,000              $14,250

NPV = -$19,000 + $3,000/1.151+ 6,300/1.152+14,250/1.153= $2,485 (Approx)

Note1 Sale of equipment Sale Procced $5,000

Less Tax25% $1,250

Net Cash Inflow $3,750

Note2 Sale of Inventory Sale Procced $2,000

Less Tax25% $500

   Net Cash Inflow $1,500     

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