Question

Use the following information to answer the 8 questions (filling in the blanks) that follow it. When answering the questions, DO NOT use dollar signs, DO NOT use parenthesis to denote negative numbers, USE the negative sign and place it in front of first digit of your answer when your answer is a negative number. Enter answer en millions rounding to 2 decimals.  For example,

if your answer is -$1,246,300.40 then enter -1.25;

if your answer is $462,100.20 then enter 0.46;

if your answer is $100,000 then enter 0.10;

RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $30 million a year. Variable costs are 75% of sales. The project is expected to last 10 years. Also, non-variable costs are $4,000,000 per year. The company has spent $1,000,000 in research and a marketing study that determined the company will lose (cannibalization) $10 million in sales a year of its existing low-priced stoves. The production variable cost of the existing low-priced stoves is $8 million a year.

The plant and equipment required for producing the new line of stoves costs $10,000,000 and will be depreciated down to zero over 20 years using straight-line depreciation. It is expected that the plant and equipment can be sold (salvage value) for $6,000,000 at the end of 10 years. The new stoves will also require today an increase in net working capital of $2,000,000 that will be returned at the end of the project.

The tax rate is 40 percent and the cost of capital is 10%.

1. What is the initial outlay (IO) for this project?

2. What is the annual Earnings before Interests, and Taxes (EBIT) for this project?                                    

3. What is the annual net operating profits after taxes (NOPAT) for this project?

4. What is the annual incremental net cash flow (operating cash flow: OCF) for this project?

5. What is the remaining book value for the plant at equipment at the end of the project?

6. What is the cash flow due to tax on salvage value for this project? Enter a negative # if it is a tax gain (remember in millions and 2 decimals). For example, if your answer is a tax on capital gains of $3,004.80 then enter   -0.03 ; if your answer is a tax shelter from a capital loss of $100,000.20 then enter 0.10  

7. What is the project's cash flow for year 10 for this project?

8. What is the Net Present Value (NPV) for this project?

Answer 1

As per the rules answering only first 4 parts.

1. Initial Outlay = Initial Investment + Working Capital

= 10000000 + 2000000

= 12000000

= 12 Mil.

2. EBIT = Sale - Variable cost - Loss on sales - fixed cost

Sales = 30000000

Variable cost = 30000000 * 75% = 22500000

Loss on sales = Loss - variable cost

= 10000000 - 8000000 = 2000000

Fixed cost = 4000000

EBIT = 30000000 - 22500000 - 2000000 - 4000000

= 1500000

= 1.5 Mil

3. NOPAT = EBIT - Depreciation ( 1 - tax rate)

Depreciation = 10000000/20 = 500000

NOPAT = 1500000 - 500000 ( 1 - 40%)

= 1000000 * 60%

= 600000

= 0.6 Mil

4. OCF = NOPAT + Depreciation

= 600000 + 500000

= 1100000

= 1.1 Mil