FCI $400 at t thousads of dollars. A proposed project requires a fixed capital i
ID: 2811293 • Letter: F
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FCI $400 at t thousads of dollars. A proposed project requires a fixed capital investment ot the MACRS in Turto time zero plus FCI $700 in year 1 for new process equipment to be depreciated using Method for equipment with a 9.5-year class life and a 5-Year recovery period (Table 9.2 n text). Plant startup occurs in the middle of year I, For year 1, annual sales are projected to 300 and operating costs will be $350 per year. For years 2-10, annual sales are projected to be $700 and operating costs will be $450 per year. $100 for working capital investment is also needed in year l, and working capital return is expected to equal $100 at the end of the project (year 10). alvage value of the new process equipment is expected to be $100 at the end of the project. The effective income tax rte is 40%. Part a) Determine after tax cash flows for years 0, 1, 2, and 10 (final year) only. You may assume that other positive income exists within the company, such that negative taxable income in any given year can be deducted (for tax purposes) in the year incurre Use the table below to document your intermediate values in your calculations (in thousands of dollars). (20 pts) Year 0 Year 1 Year 2 Year 10 Taxable income Tax @ 40% Net income After-tax cashExplanation / Answer
Year 0 1 2 10 MACRS rates Revenues 500 700 700 20 Operating costs -350 -450 -450 32 MACRS Depn.(on 400) -80 -128 19.2 (on 700) -140 11.52 Taxable Income 70 -18 250 11.52 Tax at 40% -28 7.2 -100 5.76 Net Income 42 -10.8 150 100 Add back:Depn. 80 268 Operating cash flows------1 122 257.2 150 CAPEX cash flows Capital investment -400 -700 Working capital inv.& recovery -100 100 After-tax salvage(100*(1-40%)) 60 Total CAPEX &W/C cash flows------2 -400 -800 160 Total annual cash flows(1+2) -400 -678 257.2 310
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