Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $837,700.00 work cell. Further, it will cost the firm $59,400.00 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 $73,500.00. 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 $6,100.00. Finally, the firm will invest $10,500.00 in net working capital to ensure the project has sufficient resources to be successful.

The project will generate annual sales of $915,000.00 with expenses estimated at 40.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 38.00%.

The work cell is estimated to have a market value of $453,000.00 at the end of the fourth year. The firm expects to reclaim 87.00% of the final NWC position.

The cost of capital is 13.00%.

What is the yearly operating cash flow for the project?

Answer 1

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Purchase Cost of Work Cell = Work Cell cost + Delivery and installation cost of work cell

= $837,700.00 + $59,400.00

= $897,100

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Depreciation = Purchase Cost of Work Cel / 20 years

= $897,100 / 20 years

= $44,855

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