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Sugar Land Company is considering adding a new line to its product mix, and the capital...

Sugar Land Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by a MBA student. The production line would be set up in unused space (Market Value Zero) in Sugar Land’ main plant. Total cost of the machine is $330,000. The machinery has an economic life of 4 years and will be depreciated using MACRS for 3-year property class. The machine will have a salvage value of $35,000 after 4 years. The new line will generate Sales of 2,000 units per year for 4 years and the variable cost per unit is $114 in the first year. Each unit can be sold for $220 in the first year. The sales price and variable cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm’s net working capital would have to increase by $30,000 at time zero (No change in NWC in years 1 through 3 and the NWC will be recouped in year 4). The firm’s tax rate is 40% and its weighted average cost of capital is 11%. The text below can be copy/pasted into the submission box below. Please save your work often as you type your answers. a. What are the annual depreciation expenses for years 1 through 4? (10 points) Year 1 Year 2 Year 3 Year 4 Depreciation b. Calculate the annual sales revenues and variable costs (other than depreciation), for years 1 through 4. (15 points) Year 1 Year 2 Year 3 Year 4 $ Total Sales $ Total Variable costs c. Estimate annual (Year 1 through 4) operating cash flows (25 points) Year 1 Year 2 Year 3 Year 4 Sales OCF d. Estimate the after-tax salvage cash flow (5 points) e. Estimate the net cash flow of this project (25 points) Year zero Year 1 Year 2 Year 3 Year 4 Net CF of the project f. Estimate the NPV, IRR, MIRR, and profitability Index of the project. (20 points) NPV = IRR = MIRR = PI

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Answer #1

A. Year Depreciation

1 . $110000

2. $146667

3. $48889

4. $24444

Dep convention= half yearly

A= 200%

B. Year. Sales . Variable cost

1. 440000 228000

2. 453200 234840

3. 466796 241885

4. 480800 249142

C. Year Operating Cash flows

1. $212000

2. $218360

3. $224911

4. $231658

D. Year Cash flows after tax

1. (212000-110000)(1-0.40)+110000= $171200

2. (218360-146667)(1-0.40)+146667=$189683

3. (224911-48889)(1-0.40)+48889=$ 154502

4. (231658-24444)(1-0.40)+24444= $148772

=( Cash flows- Dep)(1-tax rate)+ Dep

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