Example 1:
You are considering expanding your product line. You feel you can
sell 100,000 of these products per year for 4 years (after which
time this project is expected to shut down). The product will sell
for $6 each, with variable costs of $3 for each one produced, while
annual fixed costs associated with production will be $90,000. In
addition, there will be a $200,000 initial expenditure associated
with the purchase of new production equipment. It assumed that this
initial expenditure will be depreciated using the simplified
straight-line method down to zero over 4 years .This project will
also require a one-time initial investment of $30,000 in net
working capital associated with inventory. Finally, assume that the
firm’s marginal tax rate is 34 percent.
Please indicate how to solve this in a step by step breakdown using non-excel form, TI calculator steps are fine. Because future questions might be modeled off this. Thank you :)
Sales (100,000 units at $6/unit) | $600,000.00 |
Less: ?? Variable costs (variable cost $3.00/unit) | -$300,000.00 |
Less: ?? Fixed costs | -$90,000.00 |
Less: ?? Depreciation ($200,000/4 years) | -$50,000.00 |
EBIT | $160,000.00 |
Taxes: (taxed at 34%) | -$54,400.00 |
Net Income | $105,600.00 |
Add: Depreciation | $50,000.00 |
Net Income | $155,600.00 |
Year | Cash Flow |
0 | -$230,000.00 |
1 | $155,600.00 |
2 | $155,600.00 |
3 | $155,600.00 |
4 | $185,600.00 |
Initial Investment Year 0 = ($200000+$30,000) | -$230,000.00 |
Year 4 = $155,600 + 30,000 (WC) | $185,600.00 |
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