Question

AnimalChin! Co. has decided to sell a new line of longboards: "The Veloce." These longboards will be sold for $490 per unit and have variable costs of $328 per unit. The company has spent $350,000 for a marketing study which determined that the company will sell 2,600,000 boards in year 1. Sales will stay the same until the project is discontinued in year 8. The same marketing study also mentioned that some old clients are likely to switch to the new board. Sales of the other AnimalChin! board The Classic are likely to decrease by 300,000 units each year, the price of The Classic price $480, and variable costs are $300. Space rental, marketing and advertisement costs, and administrative expenses will total $50,000,000 per year. A few months ago, the company has also spent $3,000,000.00 to test new wheels and shock pads and they recently repaired some of their machines for $1,000,000.00. Three of these machines are currently not in use, they could be used for the production of The Veloce or could be sold today for $23,000,000.00 total (their initial cost 3 years ago was $130,000,000.00 (the company is currently depreciating these assets straight-line to zero book value over 5 years). The plant and equipment investment required for this project is $1,100,000,000.00 and will be depreciated on a straight-line basis to a zero book value over the next 8 years. Despite depreciating to zero for tax reasons, the company believes that the market value of the equipment in 8 years will be $75,000,000.00. The company will sell the equipment. The production of The Veloce will require an immediate increase in inventory of $ 140,000,000.00 that will be returned at the end of the project. The tax rate is 40%.

1.) Read the project's description very carefully. Which cash-flows are “relevant” for our project?
Remember you are looking for incremental cash flows. List which cash-flows are relevant (or not relevant) and briefly explain why.

Relevant	NOT relevant	Why?

2.) Based on your answer to question 1. Calculate the annual operating cash-flow (OCF) for the project for year 1 to year 8.

3.) Now focus on year 0. Based on your answer to question 1. What should you take into account as inflow/outflow of cash for year 0 when you start the project?

4.) Finally, focus on year 8, the termination year of your project. What should you take into account as inflow/outflow of cash besides year 8 OCF?

5.)Based on points 1-4 fill the CFFA table and compute the Cash-flow from assets (CFFA) for Year 0 to year 8. Copy and paste from excel if needed.

Item	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8
OCF
?
?
?
CFFA

Answer 1

Solution)
1) List which cash-flows are relevant (or not relevant)

Relevant	NOT relevant	Why?
New Sales Old Lost sales Plant and Equiment Cost Marketing Study Cost Machine salvage value today Plant and equipment Salvage value Increase Inventory Requirement	Space rental, marketing & advertisement costs and administrative expenses Testing Costs	Current revenue Used for Determine the Actuals sales

2) Calculation of the annual operating cash-flow is as follows

3) At Year 0 Inflow/Outflow of cash for year 0 when you start the project

Outflow
Marketing study cost = $350,000
Plant and Equipment Cost = $1,100,000,000.00
Increase in inventory = $ 140,000,000.00
Inflow
Cash generate on selling the machine = $23,000,000
4) At year 8 Inflow/Outflow of cash besides year 8 OCF
Inflow
Salvage Value = $ 75,000,000.00