Equipment book value at the end of the project life

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Reference no: EM131978354

As the financial manager of Xeroz Printing Inc., you have been asked to compute the cash flows of a proposed project for the production of printing paper. The equipment would cost $120,000, plus $10,000 for installation. Annual sales would be 5,000 units at a price of $20 per pack, and the project’s life would be 3 years. Payables would increase by $3,000 and current assets by $5,000. At the end of 3 years, the equipment could be sold for $10,000. Depreciation would be based on the MACRS 3-year class; so the applicable depreciation rates would be 33%, 45%, 15%, and 7%. Variable costs (VC) would be 70% of sales revenues, fixed costs excluding depreciation would be $25,000 per year, and the marginal tax rate is 35%.

Create the depreciation schedule of the equipment.

What is the equipment’s book value at the end of the project’s life?

Book value = Initial Cost – Accumulated Depreciation

Compute the after-tax salvage value of the equipment

After-tax salvage value = Salvage Value – (Tax * (Salvage Value – Book Value)

Create net income statements for the three years of the project’s life

Compute the Operating Cash Flows (OCF)

OCF = EBIT + Depreciation – Taxes

Compute the Free Cash Flows (FCF) of the project

Use the Projected Free Cash Flow format in the lecture notes.

Reference no: EM131978354

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