Macro Incorporated is the manufacturer of mini-excavators and is considering pro

Question

Macro Incorporated is the manufacturer of mini-excavators and is considering producing a new line of equipment in an effort to increase its market share. The new production line will cost $2, 550,000 for manufacturing the parts and an additional $630,000 is needed for installation. The equipment falls into the MACRS 3-yr class, and would be sold after four years for $600,000.

The equipment line will generate additional annual revenues of $950,000 in year 1, and $1,250,000 in the following years until the sale of the equipment. The project will attract additional annual operating expenses of $600,000. An inventory investment of $253,000 is required during the life of the project. Macro is in the 20 percent tax bracket, and its existing cost of capital is 6 percent.

Calculate the initial outlay of the project.

a. Calculate the annual after-tax operating cash flow for Years 1 - 4.

Explanation / Answer

INITIAL OUTLAY OF THE PROJECT: Cost of the new production line 2550000 Cost of installation 630000 Total cost of new production line 3180000 Increase in Net working capital (Inventory) 253000 Initial outlay of the project 3433000 Answer ANNUAL AFTER TAX OPERATING CASH FLOWS: 1 2 3 4 Incremental revenue 950000 1250000 1250000 1250000 Incremental operating expenses 600000 600000 600000 600000 Depreciation (MACRS) 1059894 1413510 470958 235638 Incremental operating income before tax -709894 -763510 179042 414362 Tax at 20% -141979 -152702 35808 82872 Incremental NOPAT -567915 -610808 143234 331490 Add: Depreciation 1059894 1413510 470958 235638 Annual after tax operating cash flow (Answer) 491979 802702 614192 567128

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