3. The chemical company IMC is considering a new line of fertilizer. IMC has alr

Question

3. The chemical company IMC is considering a new line of fertilizer. IMC has already paid $200,000 for a detailed economic study of the project. The study made the following forecast regarding the project's economics: Rev $8,000,000 18,000,000 $7,000,000 Year Variable Costs would be 60% of revenues Fixed Costs would be $800,000 each year . Project requires a $6,000,000 investment in Plant, Property, and Equipment, which can be depreciated over the life of the project using straight-line depreciation The investment in plant, property, and equipment can be sold (salvaged) at the end of the project for 20% of its initial value. o Project requires an aggregate investment in networking capital for any time period to be equal to 15% of the subsequent (following) year's revenue projection. For example the aggregate Working Capital requirement at Year 0 would be 15% of the Year 1 revenue projection; the aggregate working capital requirement at Year 1 would be 15% of the Year 2 revenue projection, etc Other information about IMC: Corporate Tax Rate is 40% IMC's Weighted Average Cost of Capital is 13% (Discount Rate) · Calculate the After Tax Cash Flows for the Project (30 POINTS).

Explanation / Answer

Capital spending in year 3 is the salvage value of the property and working capital working is below, balance in working capital is assumed to be recovered at end of year.

Ref Particulars Year 0 Year 1 Year 2 Year 3 a Sales revenue            80,00,000                1,80,00,000          70,00,000 b Less: variable costs            48,00,000                1,08,00,000          42,00,000 Less: Fixed costs              8,00,000                      8,00,000            8,00,000 Less: depreciation              6,00,000                      6,00,000            6,00,000 Profit before tax            18,00,000                   58,00,000          14,00,000 Less: tax@ 40%              7,20,000                   23,20,000            5,60,000 Profit after tax            10,80,000                   34,80,000            8,40,000 Add: depreciation              6,00,000                      6,00,000            6,00,000 c Annual operating cash flow            16,80,000                   40,80,000          14,40,000 working capital cash flow (12,00,000)         (15,00,000)                   16,50,000          10,50,000 Capital spending (60,00,000)        (12,00,000) Cash flow for the year (72,00,000)              1,80,000                   57,30,000          12,90,000

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