What is the project cash flow at time zeo

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ABC, Inc is considering launching a new product which incurred $2.5 million in Research and Development expenses over the last year. The company will spend $1.8 million to acquire the equipment necessary for the manufacture of the new product. The equipment will last for 15 years and have a salvage value of $35,000. It will be depreciated to zero over 10 years using straight line depreciation. The company will also have an increase of $250,000 in accounts receivable and a decrease of $75,000 in accounts payable. The company anticipates to produce 100,000 units every year for the next 15 years and sell the units for $4 per unit. The variable costs are $0.25 per unit and the annual fixed costs are projected to be $10,000 per year. The company has a target capital structure of 40% debt and 60% equity. The company's outstanding bonds have a yield to maturity of 5.5% and the company's tax rate is 30%. The company has a beta of 1.4, the risk free rate is 2% and the market risk premium is 6%.

Problem 1) What is the project's cash flow at time 0?

Reference no: EM132665403

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