the Guttie project and present his findings to the company\'s executive committe
ID: 2788901 • Letter: T
Question
the Guttie project and present his findings to the company's executive committee The production line would be set up in an unused section of Robertson's main plant. The machinery is relatively inexpensive, costing an estimated $240,000 ini 0 5 is 10%. Operating earnings (EBITDA) are expected to be $180,000 per year for each of the two 2 years. the end of each of the two years of operations a. What are initial cash flows for the Guttie project? b. What are the operating cash flows in the first year? c. What are the terminal year cash flows (not including the operating cash flows)? d. What is the NPV of the proiect? 9 a. What are the initial cash flows for the Guttie project? Calculate the initial cash flow below: (Round to the nearest dollar.) Initial purchase price of the new asset Installation/shipping cost of the new asset +- Change in net working capital b. What are the operating cash flows in the first year? Calculate the depreciation schedule for the first 2 years below: (Round to the nearest dollar.) 2 MACRS Rates (7-year) 2 0 Calculate the operating cash flows below: (Round to the nearest dollar.)Explanation / Answer
a) Initial Cash Outflow
b) & c) In MACRS, depreciation can be calculated as Original Cost multiplied by the MACRS rate of that year.
Depreciation in Year 1 = $240000 x 14.29% = $34,296, Ending Book Value = $240000 - $34296 = $205,704
Depreciation in Year 2 (Terminal Year) = $240000 x 24.49% = $58,776
Ending Book Value of Asset = $205704 - $58776 = $146,928
Operating Cash Flows in first year = EBITDA x (1 - Tax rate) + Tax shield on depreciation
Or, OCF in first year = $180000 x (1 - 0.30) + $34296 x 0.30 = $136,289
OCF in second year = $180000 x (1 - 0.30) + $58776 x 0.30 = $143,633
Salvage Value = $25000
Tax shield on loss on sale = ($146928 - $25000) x 30% = $36,578
Terminal Year Cash flows (Excluding OCF) = $25000 + $36578 = $61,578
d) NPV = OCF of year 1 x PVF (10%, 1) + (OCF of year 2 + Terminal Cash flow) x PVF(10%, 2)
NPV = (-)$265000 + $136289 x 0.90909090909 + ($143633 + $61578) x 0.82644628099 = $28,495
Initial Purchase Price $240,000 Installation/ shipping cost $0 Net Purchase Price $240,000 Add: Increase in inventory (It means it has to keep spend more on inventory) $25,000 Initial Cash Outflow $265,000Related Questions
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