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What are the non-operating cash flows in year zero

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After the success of their Gizmo product, Whatchamacallit Incorporated is considering another new product line, Thingies. Production will last a total of five years. Thingies sell for a whopping $10 each, and you expect to produce and sell about 4,000 Thingies each year.

  • A Thingy factory will cost $30,000 (today) to build, and it will begin production starting next year. The cost of producing each Thingy is $8, and the fixed cost of operating the plant is $100. You will depreciate the plant in a straight-line manner to $0 over the five-year project. The plant will be worthless once the project is over.
  • You will need an additional $1500 in cash starting today to cover incidental expenses. This cash will be re-absorbed back into the firm at the end of the project. The firm's tax rate is 24%. Assume that the rest of the firm is profitable, so that if there are any losses from this project, they will reduce the firm's total tax burden.

Question 1. What are the non-operating cash flows (capital spending and changes in net working capital) in year 0 (now) through year 5? What are operating cash flows in years 1 through 5? What is the internal rate of return on this project?

Reference no: EM132873609

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