ABCD Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This calculator will sell for $100. The company feels that sales will be 12,500, 13,000, 14,000, 13,200, and 12,500 units per year for the next 5 years. Variable costs will be 25% of sales, and fixed costs are $300,000 per year. The firm hired a marketing team to analyze the viability of the product and the marketing analysis cost $1,500,000. The company plans to use a vacant warehouse to manufacture and store the calculators. Based on a recent appraisal the warehouse and the property is worth $2.5 million on an aftertax basis. If the company does not sell the property today then it will sell the property 5 years from today at the currently appraised value. This project will require an injection of net working capital at the onset of the project in the amount of $100,000. This networking capital will be fully recovered at the end of the project. The firm will need to purchase some equipment in the amount of $1,200,000 to produce the new calculators. The machine has a 7year life and will be depreciated using the straightline method. At the end of the project, the anticipated market value of the machine is $150,000. The firm requires a 10% return on its investment and has a tax rate of 21%.
Calculate the operating cash flows at the end of year 1 (Round to two decimals)
Calculate the initial cash outflow ( the time 0 cash flow, enter a negative value and round to two decimals)
Part 1
Calculation of Operating Cash Flow of First Year
Particular 
Amount in $ 
Sale in Units 
12500 units 
Selling Price per Unit 
$100 
Total Sales 
$1250000 
Less : 

Variable Costs @25% 
($312500) 
Fixed Costs 
($300000) 
Marketing Cost (($1500000/5) 
($300000) 
Earnings Before Depreciation and Taxes 
$337500 
Less Depreciation (1200000750000)/7 
$150000 
Earnings Before Taxes 
$187500 
Less : Taxes @21% 
$39375 
Earnings after Taxes 
$ 148125 
Add: Depreciation 
$150000 
Operating Cash Flows 
$298125 
PVF @ 10% 
0.90909 
PV of First Year Cash Flows 
$271022.46 
Notes
Part 2
Calculation of Initial Cash Outflow
Particular 
Amount in $ 
Cost of the Machine 
$1200000 
Working Capital Invested 
$100000 
Initial Cash Flow 
$1300000 
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