Question

Project cash flow and NPV.  The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds​ (1957 replicas). The necessary foundry equipment will cost a total of

​$4 comma 100 comma 0004,100,000

and will be depreciated using a​five-year MACRS​ life,

LOADING...

. The sales manager has an estimate for the sale of the classic Thunderbirds. The annual sales volume will be as​ follows:

Year​ one:  230230		Year​ four:  380380
Year​ two:  280280		Year​ five:  300300
Year​ three:  340340

If the sales price is

​$29 comma 00029,000

per​ car, variable costs are

​$19 comma 00019,000

per​ car, and fixed costs are

​$1 comma 400 comma 0001,400,000

​annually, what is the annual operating cash flow if the tax rate is

3030​%?

The equipment is sold for salvage for

​$500 comma 000500,000

at the end of year five. Net working capital increases by

​$500 comma 000500,000

at the beginning of the project​ (year 0) and is reduced back to its original level in the final year. Find the internal rate of return for the project using the incremental cash flows.

First, what is the annual operating cash flow of the project for year 1?

*What is the annual operating cash flow of the project for year 2?

*What is the annual operating cash flow of the project for year 3?

*What is the annual operating cash flow of the project for year 4?

*What is the annual operating cash flow of the project for year 5?

*Next, what is the after-tax cash flow of the equipment at disposal?

*Then, what is the incremental cash flow of the project in year 0?

*What is the incremental cash flow of the project in year 1?

*What is the incremental cash flow of the project in year 2?

*What is the incremental cash flow of the project in year 3?

*What is the incremental cash flow of the project in year 4?

*What is the incremental cash flow of the project in year 5?

*So what is the IRR of the project?

MACRS Fixed Annual Expense Percentages by Recovery Class Click on this icon to download the data from this table Year 3-Year 33.33% 44.45% 14.81% 7.41% 5-Year 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 7-Year 14.29% 24.49% 17.49% 12.49% 8.93% 8.93% 8.93% 4.45% 10-Year 10.00% 18.00% 14.40% 11.52% 9.22% 7.37% 6.55% 6.55% 6.55% 6.55% 3.28%

Answer 1

Initial Cost	$4,100,000		year	Initial Cost	Net WC	Sales	Selling Price	Variable Cost	Fixed Cost	Dep	EBIT	EBIT(1-t)	OCF
tax	30%		A	B	C	D	E	F	G	H	I=D*(E-F)-G-H	J=I*(1-t)	K=J+H
Salvage	$500,000		0	-$4,100,000	-$500,000
Net WC	$500,000		1			230	$29,000	$19,000	$1,400,000	$820,000	$80,000	$56,000	$876,000
			2			280	$29,000	$19,000	$1,400,000	$1,312,000	$88,000	$61,600	$1,373,600
5 Year MACR			3			340	$29,000	$19,000	$1,400,000	$787,200	$1,212,800	$848,960	$1,636,160
20%			4			380	$29,000	$19,000	$1,400,000	$472,320	$1,927,680	$1,349,376	$1,821,696
32%			5		$500,000	300	$29,000	$19,000	$1,400,000	$472,320	$1,127,680	$789,376	$1,261,696
19.20%
11.52%
11.52%

Cumulative Depreciation =

$820,000

$1,312,000

$787,200

$472,320

$472,320

$3,863,840

Book Value = 4,100,000 -3,863,840 = 236,160

Salvage = 500,000

Gain = 500,000 - 236,160= 263,840

tax on gain = 0.3*263,840 = 79,152

After tax CF on salvage = 500,000 -79,152 = 420,848

Incremental CF

-$4,600,000

$876,000

$1,373,600

$1,636,160

$1,821,696

$2,182,544

Q F G Initial Cost Net Wc Sales year IRR 1 Initial Cost 2 tax 3 Salvage 4. Net WC $4,100,000 30% $500,000 $500,000 0 - $4,100,000 - $500,000 18% 280 H I J K L M N O P Selling Price Variable Cost Fixed Cost Dep |EBIT EBIT(1-t) OCF After tax sa NCF I=D*(E-F)-G-H J=I*(1-t) K=J+H -$4,600,000 $29,000 $19,000 $1,400,000 $820,000 $80,000 $56,000 $876,000 $876,000 $29,000 $19,000 $1,400,000 $1,312,000 $88,000 $61,600 $1,373,600 $1,373,600 $29,000 $19,000 $1,400,000 $787,200 $1,212,800 $848,960 $1,636,160 $1,636,160 $29,000 $19,000 $1,400,000 $472,320 $1,927,680 $1,349,376 $1,821,696 $1,821,696 $29,000 $19,000 $1,400,000 $472,320 $1,127,680 $789,376 $1,261,696 $420,848.0 $2,182,544 $3,863,840 Book Value $236,160 Gain $263,840 Tax on gain $79,152 AT Salvage $420,848.0 380 300 6 5 Year MACR 20% 32% 19.20% 11.52% 11.52% $500,000

C B 4100000 IRR A 1 Initial Cost 2 tax 3 Salvage 4 Net WC 0.3 =IRR(P3:P8) 500000 500000 5 6 5 Year MACR 7 0.2 8 0.32 9 0.192 10 0.1152 11 0.1152 D E F G H K L - M N P year Initial Cost Net WC Sales Selling Price Variable Cost Fixed Cost Dep |EBIT EBIT(1-0) OCF After tax salvage NCF A B DE F I=D*(E-F)-G-H J=I*(1-0) K=J+H --B1 =-B4 =E3+F3 230 29000 19000 1400000 =A7*$B$1 =G4*(H4-14)-34-K4 =L4*(1-$B$2) =M4+K4 =N4+F4+04 280 29000 19000 1400000 =A8*$B$1 =G5*(H5-15)-15-K5 =L5*(1-$B$2) =M5+K5 =N5+F5+05 340 29000 19000 1400000 =A9*$B$1 =G6* (H6-16)-J6-K6 =L6*(1-$B$2) =M6+K6 =N6+F6+06 380 29000 19000 1400000 =A10*$B$1 =G7*(H7-17)-17-K7 =L7*(1-$B$2) =M7+K7 =N7+F7+07 =B4 300 29000 19000 1400000 |=A11*$B$1 =G8*(H8-18)-18-K8 =L8*(1-$B$2) =M8+K8 =K13 =N8+F8+08 =SUM(K4:K8) Book Value =B1-K9 Gain =B3-K10 Tax on gain =K11*B2 AT Salvage =B3-K12 13