A pharmaceutical machinery corporation is considering purchasing a computer to c

Question

A pharmaceutical machinery corporation is considering purchasing a computer to control plant packaging for a spectrum of health products. The financial data is as follows: Investment: $120,000 50% debt equity ratio. Loan ($60,000) borrowed at 9% interest. o .Project life: 6 years Salvage value: $15,000 o Year 0 dollars .Depreciation method: 5-year MACRS · Income tax rate: 40% Annual Revenue: $145,000 o Year 0 dollars Annual Expense: $87,000 o Year 0 dollars o Does NOT include depreciation o Does NOT include interest Market interest rate ( i ): 18% If the general inflation rate (effects revenues, expenses, salvage value) during the next 6 years is expected to increase by 5% annually a. Develop the income statement for the project. [3 points] b. Develop the cash flow statement for the project. [3 points] (Hint: Don't forget the Financing Activities) Determine the PW of the project. Is the project economically viable? Why? [4 points] (Hint: Cash flows in Actual dollars, given market interest rate. Therefore, no need to convert to constant dollars before calculating PW) c. General Inflation is 5% per year

Explanation / Answer

a) Income statement for the project

b) Cash flow table for the project

c) NPV = $64933.17. Yes, the project is economically viable becuase the NPV is positive

Revenue $9,86,277 Expenses $5,91,766 Gross income $3,94,511 Depreciation $1,05,000 Operating income $2,89,511 Interest expense $32,400 Income before tax $2,57,111 Tax@40% $1,02,844 Net income $1,54,267

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