Based on these cash flows, what are the project’s NPV, IRR, Profitability Index (PI), and payback?Ĩ. Calculate the net cash flows for each year. Calculate the after-tax salvage cash flow.ħ. Working capital will be recovered at the end of year 4.Ħ. Estimate the required net working capital for each year based on sales for the following year. Construct annual incremental operating cash flow statements.ĥ. Calculate the annual sales revenues and costs (other than depreciation).Ĥ. What is the machinery’s depreciable basis? What are the annual depreciation expenses?ģ. Disregard the assumptions in part 1 above. If the company spent $40,000 last year in the upkeep of the empty lot, should this cost be included in the analysis? Why or why not?Ģ. The firm’s tax rate is 40%, and its overall weighted average cost of capital is 10%.
Net working capital would have to increase by an amount equal to 12% of sales revenues. The sales price and cost are expected to increase by 3% per year due to inflation. Each unit can be sold for $200 in the first year. This new line of business will generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. The machinery is expected to have a salvage value of $25,000 after 4 years of use. The machinery has useful life of 4 years, and it is a MACRS 3-year asset.
#OCF VS INCREMENTAL CASHFLOWS INSTALL#
The machinery’s invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equipment. Adams, Incorporated is aware you an in an MBA program and would like you to help analysis the viability of this major business venture based on the following information: The production line would be set up in an empty lot the company owns. The new line of business will be the manufacturing and distribution of animal feeds. Adams, Incorporated would like to add a new line of business to its existing retail business.
Problem Set 3: It is designed for you to demonstrate your understanding and be able to apply basic capital budgeting concepts in deciding whether to undertake an capital project or not. Construct annual incremental operating cash flow statements.
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