Drilling-Easy (DE) Inc. currently has two products, low-priced drills and a line

Question

Drilling-Easy (DE) Inc. currently has two products, low-priced drills and a line of smart drill bits. DE Inc has decided to sell a new line of high-priced drills. Sales for the new line of drills are estimated at $21 million a year. Annual variable costs are 60% of sales. The project is expected to last 10 years. In addition to the production variable costs, the fixed costs each year ill be $2,000,000. The company has spent $1,000,000 in a marketing and research study that determined the company will gain $11 milion in sales a year of its existing line of smart drill bits. The production variable cost of these sales is $9 million a year. The plant and equipment required for producing the high-priced drills costs $11,000,000 and will be depreciated down to zero over 30 years using straight-line depreciation. It is expected that the plant and equipment can be sold for $2,000,000 at the end of the project. The project will also require an increase in net working capital of $3,000,000 today that will be returned at the end of the project. The tax rate is 20 percent and the require rate of return for this project is 8%. The Initial Outlay is $ 15000000 Round your answer to the nearest dollar.) b. What is the operating cash flows (OCF) for each of the years for this project? The OCF for each year of the project are (Round your answer to the-nearest dollar.) c. What is the termination value (TV) cash flow (aka recovery cost or after-tax salvage value, or liquidation value of the assets) at the end of the project? The termination value at the end of the pro ect is Round your answer to two the nearest dollar. d. What is the NPV of this project? The NPV of this project is (Round your answer to the nearest dollar) .. 1.1 Ja :/ ". (..') More Enter your answer in the edit fields and then click Check Answer. All parts showing Clear All : 0 98 FA esc 2 4 6

Explanation / Answer

Initial outlay

cost of machine

11000000

investment in working capital

3000000

Initial outlay

14000000

Operating cash flow

Operating cash flow

sales of new line of drill

21000000

sales of existing line of drill

11000000

less variable cost

60% of sales

12600000

less variable cost

60% of sales

9000000

contribution

8400000

contribution

2000000

less fixed cost

2000000

less fixed cost

0

operating profit from new line of drill

6400000

operating profit from new line of drill

2000000

total operating profit

6400000+2000000

8400000

Year

less depreciation

(11000000-2000000)/30

300000

0

-14000000

-14000000

operating profit after depreciation

8100000

1

6780000

6277777.8

less tax 20%

1620000

2

6780000

5812757.2

after tax operating profit

6480000

3

6780000

5382182.6

add depreciation

300000

4

6780000

4983502.4

operating profit after tax before depreciation

6780000

5

6780000

4614354.1

6

6780000

4272550.1

Terminal value at the end of the project

7

6780000

3956064.9

annual operating profit after tax before depreciation

6780000

8

6780000

3663023

recovery of working capital

3000000

9

6780000

3391688

sale proceeds from the sale of equipment

800000

10

10580000

4900587.1

Terminal value at the end of the project

10580000

net present value

sum of present value of cash flow

33254487

book value of equipment

11000000-(300000*10)

8000000

less sale value

2000000

loss on sale of machine

6000000

tax shield on loss on sale of machine

6000000*20%

1200000

net sale proceeds

2000000-1200000)

800000

Initial outlay

cost of machine

11000000

investment in working capital

3000000

Initial outlay

14000000

Operating cash flow

Operating cash flow

sales of new line of drill

21000000

sales of existing line of drill

11000000

less variable cost

60% of sales

12600000

less variable cost

60% of sales

9000000

contribution

8400000

contribution

2000000

less fixed cost

2000000

less fixed cost

0

operating profit from new line of drill

6400000

operating profit from new line of drill

2000000

total operating profit

6400000+2000000

8400000

Year

less depreciation

(11000000-2000000)/30

300000

0

-14000000

-14000000

operating profit after depreciation

8100000

1

6780000

6277777.8

less tax 20%

1620000

2

6780000

5812757.2

after tax operating profit

6480000

3

6780000

5382182.6

add depreciation

300000

4

6780000

4983502.4

operating profit after tax before depreciation

6780000

5

6780000

4614354.1

6

6780000

4272550.1

Terminal value at the end of the project

7

6780000

3956064.9

annual operating profit after tax before depreciation

6780000

8

6780000

3663023

recovery of working capital

3000000

9

6780000

3391688

sale proceeds from the sale of equipment

800000

10

10580000

4900587.1

Terminal value at the end of the project

10580000

net present value

sum of present value of cash flow

33254487

book value of equipment

11000000-(300000*10)

8000000

less sale value

2000000

loss on sale of machine

6000000

tax shield on loss on sale of machine

6000000*20%

1200000

net sale proceeds

2000000-1200000)

800000

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.