Reference no: EM132995984

Question - Nufarm Ltd is considering a new project which involves the production and marketing of farming products. The project will run over five years.

The new machinery used in the production will be purchased at a cost of $3.8 million. The installation costs are estimated to be $280,000. The equipment will be fully depreciated down to zero over five years using a straight-line depreciation method. The machinery can be sold after five years for $580,000. The company will need to invest $900,000 in working capital into its operation at the beginning of project. This investment will then be recovered in full by the end of the project. In year 1, the company expects to sell about 5,000 units at the price of $800 per unit while the variable cost is $460 per unit. Annual additional operating fixed costs are $650,000. Consider a tax rate of 35%.

Required -

a. Calculate the initial investment and terminal cashflow relating to capital expenditure and working capital of this project.

b. Calculate the operating cashflow for year 1 of the project.