Question

Call-Si Corp. currently has two products, high priced cell phones and apps for its cell phones. Call-Si Corp. has decided to sell a new line of low-priced cell phones. Sales revenues for the new line of cell phones are estimated at $2,000 a year and variable costs are $1,200 a year. The project is expected to last 10 years. Also, non-variable costs are $600 per year. The company has spent $100 in a research and a development study that determined the company will have synergy gains/sales of $200 a year from sales of its existing apps for its cell phones but it will lose $80 annual sales of its high-price cell phones. The annual production variable costs are 50% of high-priced cell phone sales and 20% of apps of cell phone sales.

The plant and equipment required for producing the new line of cell phones costs $750 and will be depreciated down to zero over 15 years using straight-line depreciation. It is expected that the plant and equipment can be sold (salvage value) for $300 at the end of 10 years. The new cell phones will also require today an increase in net working capital of $50 that will be returned at the end of the project.

The tax rate is 30 percent and the cost of capital is 12%.

What is the annual depreciation of the plant and equipment?

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

What is the annual incremental net cash flow (FCF or OCF) for this project?

                               

Answer 1

Annual Depreciation = (Initial Investment - Final Depreciated value)/ no of years

= (750-0)/15

= $50 per year

The EBIT per year and FCF are calculated as below (figures in $)

Annual Sales	2000
Variable costs	1200
Non -variable costs	600
Net Earnings	200
Synergy App Sales	200
Less :Apps Cost	40
Net Earnings from Synergy app sales	160
Loss of Sale of High priced phones	80
Less: Cost of High priced cell phones	40
Net Earnings from loss of sale of high priced cell phones	-40
Less : Depreciation	50
EBIT	270
Less Tax@30%	81
PAT	189
Add: Depreciation	50
FCF	239

So, EBIT per year is $270 and FCF is $239 per year