The Bistro is planning to add a new line of noodles that will require the acquis
ID: 2804561 • Letter: T
Question
The Bistro is planning to add a new line of noodles that will require the acquisition of new processing equipment. The equipment will cost $1,000,000, including installation and shipping. It will be depreciated straight-line to zero value over the 10-year economic life of the project. Interest cost associated with financing the equipment purchase is estimated to be $40,000 annually. The expected salvage value of the machine at the end of 10 years is $200,000.
One year ago a marketing survey was performed to gauge the likely success of this new project. The survey cost $25,000, and was paid last year.
If this new equipment is acquired, it will also allow the replacement of old equipment used for other food lines. This old equipment can be salvaged for $150,000 and has a book value of $200,000. The remaining depreciation on the old equipment is $40,000 annually for five more years.
Additional net working capital of $85,000 will be needed immediately. When the project is terminated in 10 years, there no longer will be a need for this incremental working capital.
The Bistro expects to sell $300,000 worth of this new pasta annually. The cost of producing and selling the pasta is estimated to be $50,000 annually (not including depreciation or interest expense). The marginal tax rate is 40 percent.
Calculate all cash flows for the project;.
Explanation / Answer
Statement showing total cash flow of the project
Wn 1)Cash infow from sale of old machine
Particulars 0 1 2 3 4 5 6 7 8 9 10 Purchase of new equipment -1000000 Cash infow from sale of old machine 170000 WC needs -85000 Total initial cash outflow -915000 Sales 300000 300000 300000 300000 300000 300000 300000 300000 300000 300000 Cost of producing pasta -50000 -50000 -50000 -50000 -50000 -50000 -50000 -50000 -50000 -50000 Interest -40000 -40000 -40000 -40000 -40000 -40000 -40000 -40000 -40000 -40000 Depreciation -60000 -60000 -60000 -60000 -60000 -100000 -100000 -100000 -100000 -100000 PBT 150000 150000 150000 150000 150000 110000 110000 110000 110000 110000 Tax @ 40% 60000 60000 60000 60000 60000 44000 44000 44000 44000 44000 PAT 90000 90000 90000 90000 90000 66000 66000 66000 66000 66000 Add: depreciation 60000 60000 60000 60000 60000 100000 100000 100000 100000 100000 Annaul cash flow 150000 150000 150000 150000 150000 166000 166000 166000 166000 166000 Salvage value(200000-40%) 120000 WC release 85000 Total cash flow -915000 150000 150000 150000 150000 150000 166000 166000 166000 166000 371000Related Questions
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