Shark Bait Corporation is thinking of buying some new shark attractant manufactu
ID: 2818261 • Letter: S
Question
Shark Bait Corporation is thinking of buying some new shark attractant manufacturing equipment that will last 3 years. Shark Bait thinks it can sell 56,000 cans of shark attractant each year at a price of $5.50 per can if it buys the new equipment (Revenue). It costs $3.50 per can to make the attractant and the project has a projected 3 year life (Expense). Other expenses include rent on the production facility of $11,000 per year (Expense).
The new manufacturing equipment will cost $98,000 and be depreciated to zero over the 3 year life of the project. The equipment will have no salvage value after 3 years. The project will require an additional net working capital of $18,000 at the time the equipment is purchased. The tax rate is 37%
Calculate the Net Investment
Asset Cost ________________
+ Delivery and Installation ________________
= Total installed cost ________________
- Proceeds from sale of old asset ________________
+ Tax on sale of old asset ________________
+ Net working capital ________________
= Net Investment ________________
Calculate Net Cash Flow
Year 0
Year 1
Year 2
Year 3
Rev
- Oper Costs
- Dep
= OEBT
- Taxes
= OEAT
+ Dep
- NWC
+ After Tax Salvage
= NCF
Year 0
Year 1
Year 2
Year 3
Rev
- Oper Costs
- Dep
= OEBT
- Taxes
= OEAT
+ Dep
- NWC
+ After Tax Salvage
= NCF
Explanation / Answer
Asset Cost 98000 + Delivery and Installation 0 total installed cost 98000 Proceeds from sale of old asset 0 Tax on sale of old asset 0 Net working capital 18000 Net Investment 116000 Year 0 Year 1 Year 2 Year 3 Net Investment -116000 Rev 308000 308000 308000 Oper Costs 207000 207000 207000 Dep 32,666.67 32,666.67 32,666.67 OEBT 68,333.33 68,333.33 68,333.33 Taxes 25,283.33 25,283.33 25,283.33 OEAT 43050 43050 43050 Dep 32,666.67 32,666.67 32,666.67 NWC 18000 After Tax Salvage 0 0 0 0 NCF -116000 75,716.67 75,716.67 93,716.67
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