l themical company IMC is considering a new line of fertilizer. IMC tasecast reg
ID: 2804171 • Letter: L
Question
l themical company IMC is considering a new line of fertilizer. IMC tasecast regareine detailed economic study of the project. The study made the following economics: r. IMC has already paid $200,000 for a Year $8,000,000 $18,000,000 $7,000,000 variable costs would be 60% of revenues Fixed Costs would be $800,000 each year . e Project requires a $6,000,000 investment in Plant, Property, and Equipment, which can be depreciated over the life of the project using straight-line depreciation o The investment in plant, property, and equipment carn be sold (salvaged) at the end of the project for 20% of its initial value. Project requires an aggregate investment in networking capital for any time period to to 15% of the subsequent (following) year's revenue projection. For examp Working Capital requirement at Year 0 would be 15% of the Year 1 revenue aggregate Working Capital requirement at Year 1 would b projection, etc aggregate projection; the e 15% of the Year 2 revenue le t Other information about IMC: Corporate Tax Rate is 40% IMC's Weighted Average Cost of Capital is 13% (Discount Rate) Calculate the After Tax Cash Flows for the Project (30 POINTS).Explanation / Answer
YEAR
0
1
2
3
REVENUE
0
8000000
18000000
7000000
LESS VARIABLE COST 60%
4800000
10800000
4200000
LESS FIXED COST
800000
800000
800000
LESS DEPRECIATION
1600000
1600000
1600000
OPERATING PROFIT
800000
4800000
400000
LESS TAXES 40%
320000
1920000
160000
AFTER TAX NET INCOME
480000
2880000
240000
ADD DEPRECIATION
1600000
1600000
1600000
CASH FLOW FROM OPERATIONS
2080000
4480000
1840000
INITIAL INVESTMENT
-6000000
CHANGES IN NET WORKING CAPITAL
-1200000
-1500000
1650000
1050000
ADDAFTER TAX PROCEEDS FROM RECOVERY OFSCRAP VALUE
720000
TOTAL CASH FLOW
-7200000
580000
6130000
2890000
YEAR
0
1
2
3
REVENUE
0
8000000
18000000
7000000
LESS VARIABLE COST 60%
4800000
10800000
4200000
LESS FIXED COST
800000
800000
800000
LESS DEPRECIATION
1600000
1600000
1600000
OPERATING PROFIT
800000
4800000
400000
LESS TAXES 40%
320000
1920000
160000
AFTER TAX NET INCOME
480000
2880000
240000
ADD DEPRECIATION
1600000
1600000
1600000
CASH FLOW FROM OPERATIONS
2080000
4480000
1840000
INITIAL INVESTMENT
-6000000
CHANGES IN NET WORKING CAPITAL
-1200000
-1500000
1650000
1050000
ADDAFTER TAX PROCEEDS FROM RECOVERY OFSCRAP VALUE
720000
TOTAL CASH FLOW
-7200000
580000
6130000
2890000
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