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Assignment 1 (CB) FALL2014: Project Q involves purchase of machinery which will support production

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Question;Assignment 1 (CB): Project Q involves purchase of machinery;which will support production of a new product.;If the machine is purchased, we expect to sell 5,500 units per year for;FOUR years at a price of $1275 per unit.;Variable Costs to produce each unit are estimated to be $ 475. Fixed manufacturing and overhead costs are;estimated at $635,000 per year.;The machinery will cost $1,325,000, which;cost will be depreciated for TAX PURPOSES as a seven year MACRS asset. Company management believes that the;machinery can be sold for $500,000 at the end of the project.;Producing the new product will require an;initial (Yr0) investment in Net Working Capital (NWC) of $ 1,100,000. During the project life annual NWC;requirements are expected to be 25% of Sales.;The company expects to recover 60% of its NWC project investments at the;end of the project.;Assume a 40% aggregate tax rate and a;required rate of return of 20%. Should;the company undertake this project?;First prepare a Depreciation Schedule;Yr Depreciation;Expense Book;Value;1;2;3;4;Next prepare projected Annual Income;Statements;Yr1;Yr2 Yr3 Yr4;Sales;VC;FC;EBITDA;Depn;EBIT;Taxes @ 40%;NI;Calculate OCF;NI;+Depn;OCF;Non-operating CFs;NWC Yr0;NWC Yr4;CAPEX (Capital Spending)(CS);CS Yr0;CS Yr4 (consider After-tax Salvage Value);Total Cash Flows (TCFs);Yr0 Yr1 Yr2 Yr3 Yr4;OCF;CS;NWC;TCF;What is the project?s Payback (PB) period?;What is the project?s Net Present Value;(NPV)?;What is the project?s IRR?

 

Paper#47554 | Written in 18-Jul-2015

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