*Calculate the annual operating cash-flow (OCF) for the project for year 1 to ye
ID: 2791821 • Letter: #
Question
*Calculate the annual operating cash-flow (OCF) for the project for year 1 to year 8.
*Now focus on year 0. What should you take into account as inflow/outflow of cash for year 0 when you start the project?
*Finally, focus on year 8, the termination year of your project. What should you take into account as inflow/outflow of cash besides year 8 OCF?
*Based on points 1-4 fill the CFFA table and compute the Cash-flow from assets (CFFA) for Year 0 to year 8. Copy and paste from excel if needed.
Item
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
OCF
NCS
ATS
NWC
CFFA
*Calculate the project NPV, IRR, Pay-back period. Should your company invest in The Veloce?
*Elephant Skateboards just approached your company and is willing to pay $250,000,000.00 today to have the right to produce and sell The Veloce as its own. Should Animal Chin! accept the offer? Explain why in light of your capital budgeting findings.
Item
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
OCF
NCS
ATS
NWC
CFFA
AnimalChin! Co. has decided to sell a new line of longboards: "The Veloce." These longboards will be sold for $325 per unit and have variable costs of $125 per unit. The company has spent $210,000 for a marketing study which determined that the company will sell 2,300,000 boards in year 1. Sales will stay the same un- til the project is discontinued in year 8. The same marketing study also mentioned that some old clients are likely to switch to the new board. Sales of the other AnimalChin! board The Classic are likely to decrease by 350,000 units each year, the price of The Classic price $195, and variable costs are $95. Space rental, mar- keting and advertisement costs, and administrative expenses will total $27,000,000.00 per year. A few months ago, the company has also spent $5,000,000.00 to test new wheels and shock pads and they recent ly repaired some of their machines for $2,400,000.00. Three of these machines are currently not in use they could be used for the production of The Veloce or could be sold today for $30,000,000.00 total (their initial cost 3 years ago was $105,000,000.00 (the company is currently depreciating these assets straight- line to zero book value over 5 years). The plant and equipment investment required for this project is $1,000,000,000.00 and will be depreciated on a straight-line basis to a zero book value over the next 8 years. Despite depreciating to zero for tax reasons, the company believes that the market value of the equipment in 8 years will be $70,000,000.00. The company will sell the equipment. The production of The Veloce will require an immediate increase in inventory of $ 135,000,000.00 that will be returned at the end of the project. The tax rate is 40%. The management team believes that the project has slightly more risk than the company's core business. Anima!Chin! WACC is 12% and the company's CFO has decided to apply an adjustment factor of 3% to ac- count for additional risk. The appropriate required rate of return is therefore 15%Explanation / Answer
SP 325 units 2300000 VC 125 Marketing (sunk) 210000 Loss in classic 350000 195 - 95 Fixed cost P.A. 27000000 test sunk 5000000 mc repairs 2400000 M/c sold 30000000 105000000/5 eq 1000000000 8 years 125000000 SV 70000000 Inc in inventory 135000000 Tax 40 ROR 15% 1 Years 0 1 to 8 8 Initial Investment -1000000000 Working Capital -135000000 135000000 Salvage value 70000000 Sales 747500000 Variable Cost 287500000 Fixed Cost 27000000 Depreciation (1380800/15) 125000000 Earnings before taxes 308000000 less tax saving (@40%) 123200000 EAT 184800000 Depreciation 125000000 Cash flow after taxes $ -1135000000 309800000 205000000 cash flows initial operational terminal Research cost, test and repair costs are incurred already and are therefore sunk and ignored Market value of old equipment i.e. 37000 is opportunity cost, but since it is a non cash cost it is ignored Working capital is assumed to be recovered at the end of the project 2 Calculation of NPV 0 1 to 8 8 Total CFAT -1135000000 309800000 205000000 PV Factor @ 15% 1 4.48732151 0.326901774 Present value -1135000000 1390172203 67014863.64 322187066.7 3 Payback Period Initial investment/Annual cash flows 1000000000/309800000 3.227889 Years 4 IRR Outflow = Inflow 1135000000= 309800000 x PVAF(r,8) + 205000000 x PVIF(r,8) r NPV 20% 101428555.1 r 0 30% -203796555 Using Linear Interpolation r-20/30-20=(0-101428555.1)/(-203796555-101428555.1) r= 23.3231% Project should be accepted as - NPV positive Payback period within life of project IRR More the Cost of capital i.e. 15% 5 Consideration of proposal - Consideration offered 250000000 NPV of project 322187066.7 Net benefit -72187066.72 Therefore it is not profitable to sell rights of new board because it will result in loss to the company. Also, if we sell the rights then we will also loose customers of classic board. Offer should be rejected Please provide feedback… Thanks in Advance :-)
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