Company is adding a new line to their product mix

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Reference no: EM131458693

A company is adding a new line to their product mix

• Spent 100,000 over the last two years to rehabilitate the production site

• The machines invoice is $240,000. IT will have a four year life, but it is placed on MACRS 5 year class. Expected salvage value of $38,000 after 4 years.

• New line will generate 1,250 per year for four years.

• Production costs are $100 first year

• The units can be sold for $200

• Sale price and cost expected to increase 3% per year.

• New working capital of the new line should be equal to the first year sales revenue.

• New product is expected to decrease sales of other lines in the firm by $50,000 per year.

• Tax rate 35%

• The firm is all equity:

o $2.25 per dividend

o $53.75 stock price

o Dividends expected to grow 4% per year

o Beta 1.17

o Treasury bills yield 3.45%

o Market Risk premium: 4.85%

Could Someone explain how to calculate the following?

• A project’s Time 0 cash flow

• The after-tax salvage cash flow

• The annual operating cash flows, OCF (how to do for say 1-5 years)

• Cash flow from assets, CFFA

• The appropriate discount rate for a project

• The NPV

• IRR

• Payback period

Reference no: EM131458693

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