Reference no: EM132939144

Management are considering a project to buy and operate a major item of equipment. Your boss is extremely enthusiastic about the project, arguing that (i) it has a very high rate of return and acceptable payback period, and (ii) it will definitely add to shareholder value. The equipment costs $385,000, is anticipated to be sold at the end of year 5 for $20,000, and will be depreciated straight line over the five-year period. The equipment will be used to manufacture a new type of electrical switch which will be sold at a price of $2.50 per unit. Expenses associated with this project other than depreciation can be assumed to be 51% of the sales revenue.

The relevant discount rate is 12.5% and can be assumed to be the hurdle rate for both the accounting rate of return and the internal rate

Year Sales (units)

1 58,000

2 72,000

3 86,000

4 100,000

5 114,000

Problem 1) Calculate the projected yearly profit and operating cash flows.