Your firm is considering an overseas expansion. Below is the information that yo

Question

Your firm is considering an overseas expansion. Below is the information that you have been given regarding the project: Initial Equipment Cost: $100m. Life of System: 5 years. Depreciation method: Straight line Depreciation. Expected overseas sales: $135m per year. Raw materials: $75m per year. Salaries for new workers: $25m per year. Net Working Capital necessary for plant to operate effectively: $25m (assume that this investment is required at the start of the project and is recovered when the plant shuts down after 5 years.) Marginal Tax Rate on income and capital gains: 30% Expected salvage value of equipment after 5 years: $30m. What will be the cash flows of this project in millions?

Explanation / Answer

Table of cash flows for the project during the 5 year period:

All values are in million dollars

0 1 2 3 4 5 Overseas sales 135 135 135 135 135 Raw materials 75 75 75 75 75 Salaries 25 25 25 25 25 Depreciation 14 14 14 14 14 Operating income 21 21 21 21 21 Tax@30% 6.3 6.3 6.3 6.3 6.3 Income after tax 14.7 14.7 14.7 14.7 14.7 Operating cash flows 28.7 28.7 28.7 28.7 28.7 Initial investment -125 After tax salvage value 21 Recovery of nwc 25 Net cash flows -125 28.7 28.7 28.7 28.7 74.7

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