Question

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 :)

Answer 1

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