Identify the project cash flow in year 5

Reference no: EM133326494

Case: Innovation Inc. sells tablets and smartwatches. The company is considering a new 5-year project that would utilize existing equipment. This equipment was purchased 2 years ago for $812,500 and has a current market value of $625,000. The project will also increase inventory by $50,000 and accounts payable by $66,000. All net working capital will be recovered at the end of the project. The fixed assets will be depreciated on a straight-line basis to zero over the life of the project, and will be salvaged for $20,000 at the end of the project.

Last year, Innovation Inc. sold 8,600 smartwatches for $60 each, and 5,200 tablets for $110 each. After purchasing the new equipment, Innovation Inc. expects to sell 10,000 smartwatches for $55 each and 14,000. The price of tablets will remain unchanged.

The new equipment will reduce the variable cost of smartwatches from $50 to $42. The variable cost of tablets is expected to remain $75. The project will also reduce fixed production costs by $18,000 annually.

Innovation Inc. faces a 21 percent tax rate and the company's discount rate is 12.8 percent.

Question 1: Calculate the total incremental revenues from this project.

Question 2: Calculate the Operating Cash Flow for this project.

Question 3: Identify the project cash flow in Year 0.

Question 4: Identify the project cash flow in year 5.

Question 5: Compute the NPV for this project.

Reference no: EM133326494

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