The R&D of the Advanced Electronics, Inc. (AE) designed a product commissioned b

Question

The R&D of the Advanced Electronics, Inc. (AE) designed a product commissioned by the military, but with applications in commercial markets as well. To manufacture and market the product AE needs to build new manufacturing facilities, and will need an initial investment of $8 million. The company expects to sell 5,000 units annually for the next five years at a price of $2,800 per unit. The expected salvage value of the manufacturing facilities at the end of five years is expected to be $1.9 million, and the facility will be depreciated according to a seven-year MACRS property class. The operating and maintenance costs are estimated to be $1.1 million per year. The manufacturing cost will be $1,200 per unit, and it does not include depreciation. The combined (federal and state) tax rate for AE is 34%, and this project will not change the company

Explanation / Answer

Project Should be Accepted

Year 1 2 3 4 5 Annual Sales $14,000,000.00 $14,000,000.00 $14,000,000.00 $14,000,000.00 $14,000,000.00 Production Cost $6,000,000.00 $6,000,000.00 $6,000,000.00 $6,000,000.00 $6,000,000.00 Operating & Maint. Cost $1,100,000.00 $1,100,000.00 $1,100,000.00 $1,100,000.00 $1,100,000.00 Depreciation $871,429.00 $1,493,878.00 $1,067,055.00 $762,182.00 $544,416.00 Net Annual Income $6,028,571.00 $5,406,122.00 $5,832,945.00 $6,137,818.00 $6,355,584.00 Less: Tax Expense $2,049,714.14 $1,838,081.48 $1,983,201.30 $2,086,858.12 $2,160,898.56 Income After Tax $3,978,856.86 $3,568,040.52 $3,849,743.70 $4,050,959.88 $4,194,685.44 Add: Depreciation $871,429.00 $1,493,878.00 $1,067,055.00 $762,182.00 $544,416.00 Net Cash Flow $4,850,285.86 $5,061,918.52 $4,916,798.70 $4,813,141.88 $4,739,101.44 Salvage $2,362,753.60 Total Cashflow $4,850,285.86 $5,061,918.52 $4,916,798.70 $4,813,141.88 $7,101,855.04 PVF @12% 0.892857143 0.797193878 0.711780248 0.635518078 0.567426856 PV of Cashflow $4,330,612.38 $4,035,330.45 $3,499,680.20 $3,058,838.68 $4,029,783.28

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