Q. You are evaluating a project for your company. Equipment for the project has
ID: 2765549 • Letter: Q
Question
Q. You are evaluating a project for your company. Equipment for the project has a cost of $250,000. there will also be a delivery expense of $35,000 and installation expenses of $65,000. This equipment will be depreciated as a 7 year asset under MACRS. It is expected to have a salvage value of $30,000. At the end of the project's life, the equipment will be sold for it's salvage value. In addition, a net working capital investment of $100,000 will be made. At the end of the projects life, this net working capital will be allowed to 'cash out'. this project is expected to generate $150,000 each year. the cash operating expenses will be $50,000 each year. In addition additional net working capital of $10,000 will be invested during each year of the project's life. At the end of the project this net working capital will also be returned to cash. Assume that the company's required rate of return is 14% and that the marginal tax rate is 40%
a. What are the Free Cash Flows each year for the Project?
Above is the problem that I am working on, I am confused as to how to set up an income statment or where to even begin on this problem. I will be working this problem on excel.
Explanation / Answer
Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 MACRS rate 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% Machine Cost 350,000 Book value at the end = 16,100 salvage value 30,000 Capital Gain taxable 13,900 Capital Gain Tax @40% 5,560 Calculations Free Cash flow Investment in machine with freight & installation (350,000) Net Working Capital (100,000) 100,000 Additional NWC= (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) Recovery of NWC 70,000 Equipment Salvage 30,000 Revenue generation 150,000 150,000 150,000 150,000 150,000 150,000 150,000 Cash Operating Expenses (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) Depreciation @MACRS rate (50,015) (85,715) (61,215) (43,715) (31,255) (31,220) (31,255) Taxable Income 49,985 14,285 38,785 56,285 68,745 68,780 68,745 Tax @40% (19,994) (5,714) (15,514) (22,514) (27,498) (27,512) (27,498) Tax on Capital Gain (5,560) Post Tax Income 29,991 8,571 23,271 33,771 41,247 41,268 35,687 Add Back Depreciation 50,015 85,715 61,215 43,715 31,255 31,220 31,255 Net Free Cash Flow(with NWC & Salvage) (450,000) 70,006 84,286 74,486 67,486 62,502 62,488 256,942 PV factor @14% 1 0.877 0.769 0.675 0.592 0.519 0.456 0.400 PV opf Net Free cash flows (450,000) 61,409 64,855 50,276 39,957 32,462 28,469 102,684
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