Roten Manufacturing Company is considering an investment on a machine for produc
ID: 2783604 • Letter: R
Question
Roten Manufacturing Company is considering an investment on a machine for producing auto parts. The machine costs $250,000 today, will have a five-year life and will be depreciated over a five-year life on a straight-line basis toward a zero salvage value. The company paid a consulting company $7,000 last year to help them decide whether there is a sufficient demand for the auto parts. In addition to the investment on the machine, the company also invests $15,000 in net working capital. The company has estimated the performance of the new machine and believes the following are good estimates of the new asset: sales $140,000 per year, cost of goods sold (35% of sales) per year, and administrative expenses $15,000 per year. The company pays interest $20,000 annually on average, has a 10% cost of capital and a 30% tax rate. Answer Questions 1 - 8.
Should Roten include consulting fee, $7,000, in estimating project's cash flows?
Yes
No
Question 2
What is the project cash flow at Year 0?
-$203,000
-$250,000
-$15,000
-$265,000
3.What is the project cash flow at Year 5?
$68,200
$83,200
$74,000
$50,500
Question 4
What is payback period for the project?
4.51 years
3.78 years
4.02 years
3.89 years
a.Yes
.No
Question 2
What is the project cash flow at Year 0?
a.-$203,000
b.-$250,000
c.-$15,000
.-$265,000
3.What is the project cash flow at Year 5?
a.$68,200
b.$83,200
c.$74,000
d.$50,500
Question 4
What is payback period for the project?
a.4.51 years
b.3.78 years
c.4.02 years
d.3.89 years
Roten Manufacturing Company is considaring an investment on a machine for producing auto parts. The machine costs S250,000 today, will have a five-year life and will be depreciated over a five-year life on a straight-line basis toward a zero savage value. The company paid a consulting company $7,000 last year to help them decide whether there is a suflicient demand lor the auto parts. In addition to the investment on the machine, the company also invests $15 D00 in net working capital. The company has estimated the pe o mance ofthe new machine and believes he following are good estimates of the new asset sales $140,000 per year cost of goods sold 35% of sales per year and administrative expenses 15,000 per year. The company pays interest $20,000 annually on average, has a 10% cost of capital and a 30% tax rate. Answer Questions 1-8. Should Rotan include consulting fee, 7,000, in estimating project's cash flows? O a. Yes b. NoExplanation / Answer
Fee paid to consulting company is not considered in FCF analysis because expense is already incurred. This is called sunk cost.
Annual interest $20,000 is also not considered in FCF analysis because cost of debt is included in cost of capital (WACC)
CF0 = -265,000
CF5 = 83,200
Payback period = 3.89 Years
Investment 0 1 2 3 4 5 Machine Cost -250,000 Depreciation 50,000 50,000 50,000 50,000 50,000 Tax saving on depreciation @ 30% 15,000 15,000 15,000 15,000 15,000 Book Value 0 Market Value 0 After-tax MV = MV - (MV - BV)*Tax 0 Net change in WC -15,000 15,000 Cash flow (X) -265,000 15,000 15,000 15,000 15,000 30,000 Operation Revenue 140,000 140,000 140,000 140,000 140,000 COGS (35% of sales) -49,000 -49,000 -49,000 -49,000 -49,000 Administrative expenses -15,000 -15,000 -15,000 -15,000 -15,000 Profit 76,000 76,000 76,000 76,000 76,000 Tax @ 30% -22,800 -22,800 -22,800 -22,800 -22,800 Cash flow (Y) 53,200 53,200 53,200 53,200 53,200 FCF (X + Y) -265,000 68,200 68,200 68,200 68,200 83,200 NPV @ 10% 2,845.48 IRR 10.41% Commulative FCF -265,000 -196,800 -128,600 -60,400 7,800 91,000 Payback Period = (3+60,400/68,200) 3.89Related Questions
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