Compute the depreciation basis and annual depreciation

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Question: We assume that the company you selected is considering a new project. The project has 8 years' life. This project requires initial investment of $550 million to purchase equipment, and $28 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 2,560,000 and the expected annual growth rate is 10%. The sales price is $285 per unit and the variable cost is $230 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 2.0%. The required net operating working capital (NOWC) is 10.8% of sales. Corporate tax rate is 25% 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. The WACC is 8.05%

- Compute the depreciation basis and annual depreciation of the new project.

- Estimate annual cash flows for the 8 years.

- Draw a time line of the cash flows.

Reference no: EM132761499

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