Reference no: EM133179312

Question - Cash Flow Estimation - We assume that a company is considering a new project. The project has 8 years' life. This project requires initial investment of $235 million to purchase the building, and purchase equipment, and $15 million for shipping & installation fee. The fixed assets (Total of 235+15= $250 M) fall in the 7-year MACRS class. The salvage value of fixed assets is $38 million. The number of units of the new product expected to be sold in the first year is 900,000 and expected to grow at annual growth rate of 9%. The sales price is $265 per unit and the variable cost is $174 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) for each year is 15% of sales for that year. The company is in the 21% tax bracket. The company's optimal capital structure is 65% equity and 35 debt financing. Assume a WACC of 7 % based on target capital structure of this firm.

Required -

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

2. Estimate annual net cash flows of the project for all the 8 years.

3. Draw a timeline of the cash flows.