Compute the initial cash flow

Reference no: EM131951145

Question: Your business is considering a 3-year project, which requires an initial investment in equipment of $1, 500,000. The equipment will be depreciated straight-line to zero over its 3-year tax life. After the project ends (at the end of year 3), you can sell the equipment for $250,000. The project also requires an initial investment in net working capital of $200,000, all of which will be recovered at the end of the project. (There are no other outlays for net working capital.) The project will generate $1, 400,000 in annual sales, with total annual costs of $800,000. The tax rate for your business is 30 percent, and you estimate the required return for the project to be 14 percent.

a. Compute the annual operating cash flow (years 1 through 3)

b. Compute the initial (year zero) cash flow.

c. Compute the (after-tax) salvage value.

d. Provide the free cash flow for year 0, year 1, year 2, and year 3.

e. Compute the NPV for this project.

f. Would you pursue this project (and why)?

Reference no: EM131951145

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