Expansion project that initial fixed asset investment

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Reference no: EM132044532

1. Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.672 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will be worthless. The project is estimated to generate $3,264,000 in annual sales, with costs of $1,305,600. Required: If the tax rate is 31 percent, what is the OCF for this project?

2. Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.616 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $436,800. The project requires an initial investment in net working capital of $624,000. The project is estimated to generate $4,992,000 in annual sales, with costs of $1,996,800. The tax rate is 31 percent and the required return on the project is 11 percent.

a) What is the project's year 0 net cash flow?

b) What is the project's year 1 net cash flow?

c) What is the project's year 2 net cash flow?

d) What is the project's year 3 net cash flow?

e) What is the NPV?

3. A 6-year project has an initial fixed asset investment of $42,000, an initial NWC investment of $4,000, and an annual OCF of -$64,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. Required: If the required return is 19 percent, what is the project's equivalent annual cost, or EAC? (Do not round your intermediate calculations.)

4. Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,100,000 and will last for 4 years. Variable costs are 38 percent of sales, and fixed costs are $150,000 per year. Machine B costs $4,310,000 and will last for 7 years. Variable costs for this machine are 27 percent of sales and fixed costs are $115,000 per year. The sales for each machine will be $8.62 million per year. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis.

a) If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A?

b) If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B?

Reference no: EM132044532

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