What is depreciation tax shield of last year of project

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Reference no: EM132771195

Baldwin, a profitable widget maker, has developed an innovative new product called the Turbo-Widget (TW). Baldwin has invested $300,000 in R&D to develop TWs, and expects that TWs will capture a large share of the market. Yes this looks familiar.

Baldwin will have to invest $2 million in new equipment. The machines have a 5-year useful life, with an expected salvage value of $250,000. The machines will require a major overhaul after 3 years, costing $100,000.
Over the five-year product life-cycle, unit sales are expected to be 5,000 units, 8,000 units, 12,000 units, 10,000 units, and 6,000 units. Prices in the first year will be $480, and then will grow 2% annually.
Sales and administrative costs will be $150,000 every year. Production costs will be $500 / unit in the first year, but will decline 8% annually.
Baldwin must maintain approximately 2 weeks inventory of TWs, or 4% (2 / 52) of forecasted annual sales. Inventory can be stored in one of Baldwin's existing warehouses. The firm estimates that inventory will require 3,000 square feet and warehouse space costs $80 / s.f. / year.
Customers don't pay immediately. Baldwin expects to have 30days of sales outstanding as accounts receivable. Raw materials must be paid for immediately.
The tax rate is 34% and the after-tax cost of capital is 12%.

Problem 1: What is the 2nd year net working capital of the project (in thousands)?

A. $100

B. $510.5

C. $529.5

D. $0

Problem 2: What is the depreciation tax shield of the last year of the project (in thousands)?

A. $136

B. $78.3

C. $39.2

D. $130.6

Reference no: EM132771195

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