WDI Inc. is considering an expansion of their product line into Europe. The expa
ID: 2697243 • Letter: W
Question
WDI Inc. is considering an expansion of their product line into Europe. The expansion would require a purchase of equipment with a price of EUR1,200,000 and additional installation of EUR300,000 (assume that the installation costs cannot be expensed, but rather, must be depreciated over the life of the asset). Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by EUR600,000 per year over current levels for the next 5 years; however, expenses will also increase by EUR200,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are equal except that the terminal value of the project in year 5 may change total after-tax cash flows for that year.) The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for EUR500,000. The firm's required rate of return on the project is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a value of EUR 0 over the 5-year life of the equipment, and the initial investment (at year 0) also requires an increase in NWC of EUR100,000 (to be recovered at the sale of the equipment at the end of five years). The current spot rate is $1.28/euro.
a) What are the annual operating cash flows (OCFs) in EUR for the WDI Inc. project where OCF = EBIT
Explanation / Answer
a) What are the annual operating cash flows (OCFs) in EUR for the WDI Inc. project where OCF = EBIT
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