Question

# 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?

 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