Reference no: EM132444167

Problem 1: You have a potential project that requires an investment of net working capital (NWC). The project itself starts now, the first cash flow from sales is realized at the end of this year, and the project will last for five years total. The required NWC investment is $400; 000. As is standard, you must make the NWC investment at the time the project begins, and you recover all the NWC investment at the time the project ends. Your cost of capital is 9%.

(a) Draw a timeline.

(b) What is the present value of all the cash flows associated with NWC?

(c) How much would you pay to eliminate the need for this NWC investment?

Problem 2: As part of the project above, you have to buy a machine today that will last for five years and costs $2:5M. You plan on depreciating the machine straight-line to zero over its five-year life, and the machine will be worthless at the end of the project. Your corporate income tax rate is 30%, and you always have enough income to be paying tax.

(a) Draw a timeline of all the cash flows associated with buying and depreciating the machine. Remember that depreciation itself is not a cash ow, but that depreciation has cash ow implications.

(b) What is the present value of all the cash flows associated with buying and depreciating the machine?

(c) In words, why would you prefer to accelerate depreciation (take depreciation sooner)?

(d) Now assume that you have to depreciate the machine straight-line to zero over five years, but you can sell it for $500; 000 at the end of five years. What is the additional after-tax cash ow from the sale?