you are an analyst with smith securities. one of the companies that you follow i
ID: 2668504 • Letter: Y
Question
you are an analyst with smith securities. one of the companies that you follow is Mac Company. Mac Company is considering the purchase of a new 400-ton stamping press. The press cost $500,000. The press will depreciate straight-line to $100,000 over a five-year life. The project will generate $250,000 in revenue and $150,000 in costs. The press will be sold for $150,000 after five year. An inventory investment of $60,000 is required during the life of the investment. Mac is in the 40 precent tax bracket. The cost of capital is 5%.1: what is Mac's net investment outlay?
2: What is Mac's annual after-tax operating cash flow?
3: What is the terminal year's after-tax non-operating cash flow at the end of year 5?
4: What is the NPV?
5: inest or not?
Explanation / Answer
Press Cost = $500,000
Annual Depreciation = $100,000
Annual revenue = $250,000
Annual costs = $150,000
Selling value of Press after 5 years = $150,000
(1) What is Mac’s net investment outlay?
Net Investment Outlay = [$500,000 + $60,000]
Net Investment Outlay = $560,000
(2) What is Mac’s annual after-tax operating cash flow?
Operating Cash flow = Operating income + Depreciation
Operating Income = Gross Profit – Operating expenses
Gross Profit = [Annual Revenue – Costs]
Gross Profit = [$250,000 - $150,000]
Gross Profit = $100,000
Operating Income = [$100,000 - $0]
Operating Income = $100,000
After-tax Operating Income = [$100,000 – (0.40 * $100,000)]
After-tax Operating Income = [$100,000 - $40,000]
After-tax Operating Income = $60,000
After-tax Operating Cash flow = [$60,000 + $100,000]
After-tax Operating Cash flow = $160,000
(4) What is the NPV?
Year
Cash flows
PV Factor at 5%
Net Present Value
0
($560,000)
1
($560,000)
1
$160,000
0.9524
$152,384
2
$160,000
0.907
$145,120
3
$160,000
0.8638
$138,208
4
$160,000
0.8227
$131,632
5
$160,000
0.7835
$125,360
6
$150,000
0.7462
$111,930
Net Present Value
$244,634
Net Present Value = $244,634
Year
Cash flows
PV Factor at 5%
Net Present Value
0
($560,000)
1
($560,000)
1
$160,000
0.9524
$152,384
2
$160,000
0.907
$145,120
3
$160,000
0.8638
$138,208
4
$160,000
0.8227
$131,632
5
$160,000
0.7835
$125,360
6
$150,000
0.7462
$111,930
Net Present Value
$244,634
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