The following is a Financial Management problem I was assigned, and I am SO LOST
ID: 2718444 • Letter: T
Question
The following is a Financial Management problem I was assigned, and I am SO LOST! Please, can someone help me with filling in the info after the question and show me how to get the answers to fill in, and also show me how to get the answers for the 4 questions at the bottom? I'm REALLY HAVING TROUBLE understanding how to get the total cash flows, incremental cash flows, etc. THANK YOU!!!
Alliance is considering automating their production process to become more efficient. In order to do so they will buy a new monorail manufacturing system at a cost of $500,000. The system will be depreciated using seven-year MACRS (15%, 25%, 17%, 12%, 9%, 9%, 9%, 4%). The system will be sold in five years for $200,000. If they buy the system they will Trade In their current trolleys for $100,000. The trolleys were originally bought four years ago for $500,000 and are being depreciated using straight-line depreciation over five years. If Alliance does not replace the trolleys, they will be kept for the next five years when they will be sold for $10,000. The new system will not affect Alliance’s sales but will reduce Costs of Goods Sold by $1,000,000. However, Fixed Costs will rise by $50,000 per year if the monorail system is installed. The tax rate is 40% and the WACC is 10%. What are the incremental cash flows associated with this proposed project?
Balance Sheet Effects |----------Depreciation Expenses-------------|
Today Year 1 Year 2 Year 3 Year 4 Year 5 End
1. Buy New Assets
2. Trade In Old Assets
3. Keep Old Assets
4. Change in NWC
Income Statement Effects
Year 1 Year 2 Year 3 Year 4 Year 5
Net Sales
- Net COGS
- Net Depreciation
- Net Fixed Costs
= Net OEBT
- Net Taxes
= Net OEAT
+ Net Depreciation
= Net Operating CF
Total Cash Flows
CF0 =
C01 =
C02 =
C03 =
C04 =
C05 =
C06 =
Homework Questions:
1. What is the Initial Cost of this project?
A. $300,000
B. $400,000
C. $500,000
D. $600,000
2. What is net depreciation expense on the income statement in Year 1?
A. -$75,000
B. -$25,000
C. $100,000
D. $175,000
3. What is the After Tax Salvage Value of selling the equipment at the end?
A. $164,000
B. $182,000
C. $218,000
D. $236,000
4. What is the Operating Cash Flow in Year 2
A. $430,000
B. $510,000
C. $560,000
D. $620,000
Please email, text, or call me.
Thank you
Kimberly Deshotels
kimberlydeshotels@gmail.com
318-787-8211
Explanation / Answer
1 What is the Initial Cost of this project? Initial Cost of this project manufacturing system cost 5,00,000 less Trade In Old Assets 100000 nitial Cost of this project 4,00,000 2 What is net depreciation expense on the income statement in Year 1 Cost of Machine 5,00,000 Depreciation rate -15% net depreciation expense -75000 3. What is the After Tax Salvage Value of selling the equipment at the end? Cost of Machine 5,00,000 Year Rate Depreciation Carriying Value 1 15% 75000 425000 2 25% 125000 300000 3 17% 85000 215000 4 12% 60000 155000 5 9% 45000 110000 Carriying Value 110000 Less Salvage value 200000 Capital Gain 90000 Tax 36000 After tax salvage value 164000 What is the Operating Cash Flow in Year 2 Savings in Cost of goods sold 1000000 less depreciation -125000 less fixed cost -50000 before tax cost saving 825000 less tax 330000 After tax cost saving 495000 ADD depreciation 125000 After tax cash flow 620000 Year Initial COGS depreciation fixed cost Before tax saving tax after tax Cash flow 0 -400000 -400000 1 1000000 75000 50000 875000 350000 525000 600000 2 1000000 125000 50000 825000 330000 495000 620000 3 1000000 85000 50000 865000 346000 519000 604000 4 1000000 60000 50000 890000 356000 534000 594000 5 1000000 45000 50000 905000 362000 543000 752000
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