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Compute the depreciation basis and annual depreciation

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Reference no: EM132949769

We assume that the company you selected is considering a new project. The project has 8 years life. This project requires initial investment of $200 million to purchase equipment, and $10 million for shipping & installation fee. The fixed assets fall in the 7-year MACRS class. The salvage value of the fixed assets is 8.5% 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 1,000,000 and the annual sales growth rate is 5%. The sales price is $120 per unit and the variable cost is $85 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 2.8%. The required net operating working capital (NOWC) is 10% of sales. .

Problem 1: Compute the depreciation basis and annual depreciation of the new project.

Problem 2: Estimate annual cash flows for all years.

Problem 3: Draw a time line of the cash flows.

Reference no: EM132949769

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