Your firm is considering an overseas expansion. Below is the information that yo

Question

Your firm is considering an overseas expansion. Below is the information that you have been given regarding the project:

Initial Equipment Cost: $100m.

Life of System: 5 years.

Depreciation method: Straight line Depreciation.

Expected overseas sales: $120m per year.

Raw materials: $70m per year.

Salaries for new workers: $20m per year.

Net Working Capital necessary for plant to operate effectively: $25m (assume that this investment is required at the start of the project and is recovered when the plant shuts down after 5 years.)

Marginal Tax Rate on income and capital gains: 35%            

Expected salvage value of equipment after 5 years: $30m.

What will be the cash flows of this project in millions?

-125/25.1/25.1/25.1/25.1/71

-125/26.5/26.5/26.5/26.5/81.5

-125/26.5/26.5/26.5/26.5/71

-100/26.5/26.5/26.5/26.5/81.5

-100/9.1/9.1/9.1/9.1/28.6

a

-125/25.1/25.1/25.1/25.1/71

b

-125/26.5/26.5/26.5/26.5/81.5

c

-125/26.5/26.5/26.5/26.5/71

d

-100/26.5/26.5/26.5/26.5/81.5

e

-100/9.1/9.1/9.1/9.1/28.6

Explanation / Answer

Answer: c -125/26.5/26.5/26.5/26.5/71

Particulars 0 1 2 3 4 5 Intial equipment cost (A) -100 New working capital (B) -25 25 Sales 120 120 120 120 120 Less: Raw materials 70 70 70 70 70 Less: Salaries for new workers 20 20 20 20 20 Less: Dep 20 20 20 20 20 Cash flow before tax 10 10 10 10 10 Less: tax @ 35% 3.5 3.5 3.5 3.5 3.5 Cash flow after tax 6.5 6.5 6.5 6.5 6.5 Add: Dep 20 20 20 20 20 OCF © 26.5 26.5 26.5 26.5 26.5 Salvage value after tax (D) 19.5 CF (A+B+C+D) -125 26.5 26.5 26.5 26.5 71

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