res ls considering a product expansion project after receiving a favorable feasi

Question

res ls considering a product expansion project after receiving a favorable feasibility study for mion. The project requires an investment in machinery today of $15 million that can SJ industries revenues of $17mrpose straight-line to zero over four (4) years. The project will generate annual year. An immediate working which it paid $5 The be depreciated for tax million in year 1 -4 and annual expenses are projected to be $12 million pretax each capital investment of $1 million is required, and working capital will remain 50% of the at that level for the life of the project. At the end of year 4 t initial value of the working capital. Also at the for S4 million. The firm is taxed at 40% and the appropriate end of year 4, the company expects to sell the machinery discount rate is 1 0%. 16. How much is the initial outlay at year 0? a. Less than $10 million b. Between $10 milion and $17 million c. Between $17 million and $25 million Above $25 million d. 17. How much is the depreciation at year 1? a. Less than $2 million b. Between $2 million and $3 million c. Between $3 million and $4 million d. Between $4 million and $5 million 18. How much is the after-tax operating income at year 2? a. Less than $1 million b. Between $1 million and $3 million c. Between $3 million and $4 million d. Between $4 million and $5 million 19. How much is the total cash flow at year 4 a. $5 million b. c. d. Between $5 million and $6 million Between $6 million and $7 million Between $7 million and $8 million

Explanation / Answer

16 b Between $10 million and $17 million Explanation: Initial investment 15 million NWC 1 million Total 16 million Feasibility studuy will not be consideed, since it’s a sunk cost 17 c Between $3 million and $4 million Explanation: Initial investment 15 million ÷ 4 years 4 Depreciation per year 3.75 million 18 a Less than $1 million Explanation: Revenue 17 million Less: expenses 12 million Depreciation 3.75 million EBT 1.25 Less Tax at 40% 0.5 After tax operating income 0.75 million 19 d Between $7 million and $8 million Explanation: After tax operating income 0.75 million Add: Depreciation 3.75 OCF year 4 4.5 Add: Salvage value (net) 2.4 million Add: recovery of NWC 0.5 million Total cash flow year 4 7.4

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