Compute the depreciation basis and annual depreciation

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Reference no: EM132165937

Problem - We assume that the company you selected is considering a new project. The project has 8 years life. This project requires initial investment of $580 million to purchase equipment, and $30 million for shipping & installation fee. The fixed assets fall in the 7-year MACRS class.

The salvage value of the fixed assets is 10% of the purchase price (including the shipping & installation fee). The number of units of the new product expected to be sold in the first year is 2,660,000 and the expected annual growth rate is 10.5%. The sales price is $280 per unit and the variable cost is $225 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 3.0%. The required net operating working capital (NOWC) is 11.8% of sales. Use the corporate tax rate obtained in Step (4) for the project.

Corporate Tax Rate = T = 35%?

The project is assumed to have the same risk as the corporation, so you should use the WACC you obtained from prior steps as the discount rate. WACC is 7.65%.

Compute the depreciation basis and annual depreciation of the new project. (Please refer to Table MACRS allowances)

Estimate annual cash flows for the 8 years.

Draw a time line of the cash flows.

Reference no: EM132165937

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