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International Paper is considering a new product launch. The project will cost $630,000, have a 5-year...

International Paper is considering a new product launch. The project will cost $630,000, have a 5-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per year, price per unit will be $24,000, variable cost per unit will be $12,000, and fixed costs will be $283,000 per year. The relevant tax rate is 35 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±9 percent. What is the worst case operating cash flow?

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Answer #1
Worst Case:
Selling price = 24000
VC per unit = 12000+9% = 13080
Sales Qty = 160 -9% = 146
Fixed cost = 283000+9% = 308470
CM per unitt= 24000-13080 =10920
Annual Operating cashflows
Total Contribution (146*10920) 1594320
Less: Fixed cost 308470
Less: Depreciation 126000
(630000/5)
Net Income before tax 1159850
Less: Tax @ 35% 405947.5
After tax Income 753902.5
Add: Depreciation 126000
Annual cashflows 879902.5
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