sugar land company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by a mba student. the production line would be set up in unused space (market value of zero) in sugar landâ main plant. total cost of the machine is $190,000. the machinery has an economic life of 4 years, and macrs will be used for depreciation. the machine will have a salvage value of 30,000 after 4 years. the new line will generate sales of 1,300 units per year for 4 years and the variable cost per unit is $100 in the first year. each unit can be sold for $200 in the first year. the sales price and variable cost are expected to increase by 3% per year due to inflation. further, to handle the new line, the firmâs net working capital would have to increase by $30,000 at time zero (the nwc will be recouped in year 4). the firmâs tax rate is 40% and its weighted average cost of capital is 10%. a. what are the annual depreciation expenses for years 1 through 4? (10 points) year 1 year 2 year 3 year4 depreciation b. calculate the annual sales revenues and costs (other than depreciation), years 1 through 4. (15 points) year 1 year 2 year 3 year4 $ sales $ variable costs c. estimate annual (year 1 through 4) operating cash flows (25 points) year 1 year 2 year 3 year4 sales ocf d. estimate the after tax salvage cash flow (5 points) e. estimate the cash flow of this project (25 points) year zero year 1 year 2 year 3 year4 cf of the project f. estimate the npv, irr, mirr, and profitability index of the project. (20 points) npv = irr = mirr = pi
sugar land company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by a mba student. the production line would be set up in unused space (market value of zero) in sugar landâ main plant. total cost of the machine is $190,000. the machinery has an economic life of 4 years, and macrs will be used for depreciation. the machine will have a salvage value of 30,000 after 4 years. the new line will generate sales of 1,300 units per year for 4 years and the variable cost per unit is $100 in the first year. each unit can be sold for $200 in the first year. the sales price and variable cost are expected to increase by 3% per year due to inflation. further, to handle the new line, the firmâs net working capital would have to increase by $30,000 at time zero (the nwc will be recouped in year 4). the firmâs tax rate is 40% and its weighted average cost of capital is 10%. a. what are the annual depreciation expenses for years 1 through 4? (10 points) year 1 year 2 year 3 year4 depreciation b. calculate the annual sales revenues and costs (other than depreciation), years 1 through 4. (15 points) year 1 year 2 year 3 year4 $ sales $ variable costs c. estimate annual (year 1 through 4) operating cash flows (25 points) year 1 year 2 year 3 year4 sales ocf d. estimate the after tax salvage cash flow (5 points) e. estimate the cash flow of this project (25 points) year zero year 1 year 2 year 3 year4 cf of the project f. estimate the npv, irr, mirr, and profitability index of the project. (20 points) npv = irr = mirr = pi
Related questions
A company is considering launching a new product. It has ordered a feasibility study at a cost of $300,000 to investigate the consequences of the investment. The study yielded the following information. Expected sales for the next four years are the following:
| Year | Units Sold |
| 1 | 63,000 |
| 2 | 70,000 |
| 3 | 78,000 |
| 4 | 60,000 |
The sales price of the new product is estimated at $200 per unit. The logistics department forecasts that net working capital requirements (NWC) will represent 20% of current year sales, and that NWC will be recovered in full in year 5. Variable costs per unit are estimated at $140, and there are annual fixed costs of $600,000 every year. Because of marketing synergies, the new product is expected to increase sales of existing products by $150,000 per year for the next 4 years.
This project requires an initial investment (machine) of $8 million that can be depreciated linearly over 8 years to zero book value. At the end of the project in year 4, the machine can be sold for 40% of the purchase price. Taxable income and capital gains are taxed at a fixed rate of 35%, and the required rate of return by investors is 16%. Compute the NPV of the project.
