Reference no: EM132516488

Situation #1: Capital Investment Decisions - 5 questions

Professor Willis Corporation (PWC) has projected a sales volume of $2,450 for the second year of a proposed expansion project based off of their current production levels. Costs normally run at 65 percent of the sales, or about $1,593 in this case. The depreciations expense will be $100 and the tax rate is 21 percent.

The expansion project will allow Professor Willis Corp. to purchase a brand-new machine to increase productivity. The new machine will cost $500,000 with a five-year life without any salvage value. The financial team has determined that depreciation is straight-line to zero. Upper management requires that there be a return of 15 percent and the tax rate is still 21 percent on the item. The operations division at PWC believes that the new machine will be capable of producing 400 additional units per year compared to what their current capacity is producing. The price per unit is $3,000 with variable cost per unit at $1,900. The additional fixed costs that need to be factored in with this project is an additional $250,000 per year. PWC will not need to utilize net working capital for this project.

The finance department within PWC believes that the unit sales, variable costs, and the fixed cost projections for the new machinery are accurate within 5 percent.

-1) For the proposed expansion project, calculate the operating cash flow?

-2) For the new machinery project, calculate the upper and lower bounds for these project-projections?

-3) For the new machinery project at 15%, the five-year annuity factor of 3.35216, calculate the following:

-Base-case NPV

-Best-case NPV

-Worst-case NPV