Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $757,000.00 work cell. Further, it will cost the firm $54,200.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $60,500.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $6,800.00. Finally, the firm will invest $11,700.00 in net working capital to ensure the project has sufficient resources to be successful. The project will generate annual sales of $918,000.00 with expenses estimated at 37.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 37.00%. The work cell is estimated to have a market value of $487,000.00 at the end of the fourth year. The firm expects to reclaim 87.00% of the final NWC position. The cost of capital is 14.00%. What is the cash flow to start the project in year 0?

Answer 1

Cash Flow of the project in the year 0 with the given information is calculated as below

Purchase price of work cell	$ 757,000
Add Installation Costs	$ 54,200
Total Cost of the work cell	$ 811,200
Add Training Costs	$ 60,500
Add Net working capital requirement	$ 11,900
Less After tax sale value of Old equipment*	$ 4,284
Cash Flows for the Project in year 0	$ 879,316

* Effective Value of Old Machinery = $0 as the machine has been fully depreciated

Market Value of Old Machiney = $ 6800

After tax sale value of Old machinery = Market Value * (1 - tax rate)

   = 6800 * (1 - 37%)

   = $4284

As this is a profit for the organisation, so it will be deducted from the cashflows as done above.

So the Total Cash Flows for the Project in year 0 are $ 879,316.