Reference no: EM132483036
Question 1: Calculate the after-tax cash flows resulting from the new project
Point 1: BrickTon Cement Inc. is considering launching a new product. Using the information provided below, calculate the after-tax cash flows resulting from the new project for each year (0-8), and determine whether the new project should be accepted or rejected, and explain why.
Point 2: A new machine will need to be purchased for $825,000. The project is expected to last 8 years, and the machine to be sold for $150,000 at the end of the 8 years of the project. The machine will be depreciated using a 10-year recovery period; you will need to use the depreciation percentages given in Table 7-3 in the textbook (the 10-year column) to compute annual depreciation for each of the 8 years of the project.
Point 3: Assume that in addition to the cost of the machine, the initial outlay will include a negative cash flow resulting from the increase in net working capital of $15,000 required to start the project. In each of the subsequent years the change in net working capital will be equal to 10% of the change in revenue in the following year (note that an increase in net working capital represents a negative cash flow, while a decrease in net working capital represents a positive cash flow). At the end of year 8, net working capital will return to the level that existed before the project was started.
Point 4: Assume the project will result in additional 300 loads of cement sold each year during the first 4 years of the project (1-4), and 400 loads of cement sold each year during the second 4 years of the project (5-8). Each load of cement will sell for a price of $2,500 in year 1. The price is assumed to rise by 5% in each year that follows. Each load of cement costs $1,500 to produce during the entire 8 years (treat the revenues and costs as cash flows).
- Further assume 14% cost of capital, and 23% tax rate.
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