What is the annual depreciation charge

Reference no: EM133432241

Question 1. Frank is looking at a new sausage system with an installed cost of $370,000. This cost will be depreciated straight-line to zero over its five-year life, after which will be worthless. The sausage system will save the firm $105,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of 28,000. Assume that the tax rate is 34% and the discount rate is 10%.

(a) What is the annual depreciation charge?

(b) What is the annual operating cash flow (OCF)?

(c). What is the project's total cash flow at Year 0? Year 1? Year 5?

(d). What is the NPV of the project? Should you accept the project?

Question 2. You are considering a new product launch. The machine to produce the products will cost $820,000, have four-year life and zero salvage value; depreciated is straight-line to zero. Sales are projected at 450 units per year; price will be $18,000 per unit, variable costs will be $15,400 per unit, and fixed costs will be $610,000 per year. The required return on the project is 15% and the relevant tax rate is 35%. These are the base case estimates. The base-case OCF of the project is $435,750 each year.

a. What is the base-case NPV?

b. Assume that the OCF of the project is $143,250 when the variable costs increase to $16,400 per unit. Evaluate the sensitivity of your base-case NPV to changes in variable costs. Explain what your answer tells you about a $100 incase in the variable costs.

Reference no: EM133432241

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