Question

You are considering creating a new product line in warehouse space that originally cost you $52,895 5 years ago.

• The required machinery would cost $6,786, should last 9 years, after which could be scrapped for $887.
• Net working capital would need to immediately increase by $4,332, but could return to normal levels after 9 years.
• Annual sales and operating costs are expected to be $7,097 and $1,688, respectively.
• 18% of customers are expected to switch over from your existing product lines.
• Your firm's cost of capital (WACC) is 8.3% and effective corporate tax rate is 43%.
• Your firm uses straight line depreciation as its depreciation method.

What is this project's incremental cash flow in its final year 9?   Enter your answer in decimal format to two decimal places (e.g., $1,538.72 would be entered as 1538.72).

Answer 1

		Initial Cash Flow:
		Cost of Machinery	($6,786)
		Increase in Net Working Capital	($4,332)
		Total Initial Cash flow	($11,118)
		Annual Cash Flow:
	A	Sales	$7,097.00
	B	Operating Cost	$1,668.00
	C	Depreciation	$655.44	(6786-887)/9
	D=A-B-C	Profit Before Tax	$4,773.56
	E=D*43%	Corporate Tax(43%)	$2,052.63
	F=D-E	Net Income	$2,720.93
	G	Depreciation(Non cash expense)	$655.44
	H=F+G	Annual Operating Cash flow	$3,376.37
		Terminal cash Flow:
		Salvage Value of machinery	$887
		Release of Incremental Net Working capital	$4,332
		Total Terminal Cash Flow	$5,219.00
		project's Incremental Cash Flow in Year 9	8595.37	(3376+5219)