Question

ABC Co. requires a 15% rate of return on its capital, and the firm is in...

ABC Co. requires a 15% rate of return on its capital, and the firm is in the 35% marginal tax bracket. The company is considering a new project that involves the introduction of a new product. This project has a 5 year life; afterwards the product will cease to exist. Given the following information: Cost of new plant and equipment: 7,250,000 Unit sales: 80,000 (year 1), 110,000 (year 2), 110,000 (year 3), 80,000 (year 4), 60,000 (year 5) Price per unit: $230 Variable costs per unit: $140 Fixed costs: $500,000 per year Depreciation method: Straight line method over 5 years. Assume that the plant and equipment will have a salvage (market) value of $750,000 at the end of year 5. Working capital requirements: there will be an initial working capital requirement of $500,000 at the start of the project. At the end of the second year of the project, the firm will need an additional $250,000 working capital injection. Finally, all working capital is liquidated at the termination of the project at the end of year 5. Calculate the operating cash flow in year 3.

Homework Answers

Answer #1
0 1 2 3 4 5
Unit sales 80000 110000 110000 80000 60000
Contribution margin at $90 per unit 7200000 9900000 9900000 7200000 5400000
Fixed costs (other than depreciation) 500000 500000 500000 500000 500000
Depreciation = (7250000-750000)/5 = 1300000 1300000 1300000 1300000 1300000
Net operating income 5400000 8100000 8100000 5400000 3600000
Tax at 35% 1890000 2835000 2835000 1890000 1260000
NOPAT 3510000 5265000 5265000 3510000 2340000
Add: depreciation 1300000 1300000 1300000 1300000 1300000
Operating cash flow 4810000 6565000 6565000 4810000 3640000
Answer
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
ABC Co. requires a 15% rate of return on its capital, and the firm is in...
ABC Co. requires a 15% rate of return on its capital, and the firm is in the 35% marginal tax bracket. The company is considering a new project that involves the introduction of a new product. This project has a 5 year life; afterwards the product will cease to exist. Given the following information: Cost of new plant and equipment: 7,250,000 Unit sales: 80,000 (year 1), 110,000 (year 2), 110,000 (year 3), 80,000 (year 4), 60,000 (year 5) Price per...
AGOURA MANUFACTURING MINI-CASE Agoura Manufacturing has announced the introduction of a new product. They forecast product-...
AGOURA MANUFACTURING MINI-CASE Agoura Manufacturing has announced the introduction of a new product. They forecast product- specific sales demand to last five years. Then because this product is somewhat of a fad, they will terminate the project. Manufacturing of the product will require the acquisition of an existing facility and purchase and installation of some new equipment. The following information describes the new project: Capital Investment requirement: Cost of new plant and equipment:      $13,750,000 Shipping and installation costs:                          $   465,000...
AGOURA MANUFACTURING MINI-CASE Agoura Manufacturing has announced the introduction of a new product. They forecast product-...
AGOURA MANUFACTURING MINI-CASE Agoura Manufacturing has announced the introduction of a new product. They forecast product- specific sales demand to last five years. Then because this product is somewhat of a fad, they will terminate the project. Manufacturing of the product will require the acquisition of an existing facility and purchase and installation of some new equipment. The following information describes the new project: Capital Investment requirement: Cost of new plant and equipment:      $13,750,000 Shipping and installation costs:                          $   465,000...
AGOURA MANUFACTURING MINI-CASE Agoura Manufacturing has announced the introduction of a new product. They forecast product-...
AGOURA MANUFACTURING MINI-CASE Agoura Manufacturing has announced the introduction of a new product. They forecast product- specific sales demand to last five years. Then because this product is somewhat of a fad, they will terminate the project. Manufacturing of the product will require the acquisition of an existing facility and purchase and installation of some new equipment. The following information describes the new project: Capital Investment requirement: Cost of new plant and equipment:      $13,750,000 Shipping and installation costs:                          $   465,000...
AGOURA MANUFACTURING MINI-CASE Agoura Manufacturing has announced the introduction of a new product. They forecast product-...
AGOURA MANUFACTURING MINI-CASE Agoura Manufacturing has announced the introduction of a new product. They forecast product- specific sales demand to last five years. Then because this product is somewhat of a fad, they will terminate the project. Manufacturing of the product will require the acquisition of an existing facility and purchase and installation of some new equipment. The following information describes the new project: Capital Investment requirement: Cost of new plant and equipment:      $13,750,000 Shipping and installation costs:                          $   465,000...
ABC corporation has existing property and equipment that is not in use. The company is considering...
ABC corporation has existing property and equipment that is not in use. The company is considering the use of this property and equipment. One option is to use the property and equipment to produce a new product. Estimates for demand of this product are 30,000 units annually for the first 5 years and 20,000 units annually for the following 6 years. Beyond that, the product is considered to be obsolete and production will cease. Price and variable costs would be...
Please show the formula from excel if you can. Thanks Question 1 : A company has...
Please show the formula from excel if you can. Thanks Question 1 : A company has the opportunity to expand its business operations by acquiring new plant and equipment. The plant and equipment will cost $80,000 and have a useful life of 6 years. At the end of the period the plant and equipment will have a salvage value of $10,000. The Tax Office allows the company to depreciate this equipment at 25% per annum using the prime cost method...
MHI Corp. is considering a capital budgeting project developing a new and improved home management system...
MHI Corp. is considering a capital budgeting project developing a new and improved home management system that will allow customers to easily inventory frequently purchased items for their home and to receive reminders when these items need to be repurchased. The firm’s WACC is 6.7%. The project is slightly more risky that the average project of the firm. You have been advised to add a 3.1% premium to the firm’s WACC for the discount rate for this project. The project...
Fincal Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This...
Fincal Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This calculator will sell for $120. The company feels that sales will be 13,000, 13,000, 14,000, 14,000, 15,000 and 12,500 units per year for the next 6 years. Variable costs will be 30% of sales, and fixed costs are $200,000 per year. The firm hired a marketing team to analyze the viability of the product and the marketing analysis cost $2,000,000. The company plans to...
The firm is looking to expand its operations by 10% of the firm’s net property, plant,...
The firm is looking to expand its operations by 10% of the firm’s net property, plant, and equipment. (Calculate this amount by taking 10% of the property, plant, and equipment figure that appears on the firm’s balance sheet.) The estimated life of this new property, plant, and equipment will be 12 years. The salvage value of the equipment will be 5% of the property, plant and equipment’s cost. The annual EBIT for this new project will be 18% of the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT