Question

RET Inc. currently has two products, low and high priced stoves. REX Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $600 a year. Variable costs are 75% of sales. The project is expected to last 10 years. Also, non-variable costs are $50 per year. The company has spent $10 in research and a marketing study that determined the company will have synergy gains/sales of $30 a year from sales of its existing high-priced stoves. The production variable cost of these sales is $20 a year.

The plant and equipment required for producing the new line of stoves costs $200 and will be depreciated down to zero over 20 years using straight-line depreciation. It is expected that the plant and equipment can be sold (salvage value) for $120 at the end of 10 years. The new stoves will also require today an increase in net working capital of $40 that will be returned at the end of the project.

The tax rate is 25 percent and the cost of capital is 10%

1. What is the initial outlay (IO) for this project?

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

3. What is the annual net operating profits after taxes (NOPAT) for this project?

4. What is the annual incremental net cash flow (operating cash flow: OCF) for this project?

5. What is the remaining book value for the plant at equipment at the end of the project?

6. What is the cash flow due to tax on salvage value for this project?

Answer 1