Question

5. A project requires an initial investment of $200,000, has a four-year life and 1s depreciated straight-line to zero. The firm is in the 34% marginal tax bracket. Other project-relevant information are provided below. Unit Sale 7,000 Price/unit-$125.00, Variable Cost - $105.00, Fixed Costs-$90,000 a. Calculate the annual Operating Cash Flow, Show your computations clearly.(13 pt.) b. If the required return for the project is 7%, should the firm undertake it under this scenario, using the NPV criterion? (7 pt.) est Low 22 Che ust 24 day 000

Answer 1

Computation of Operating cash flows P.a Particulars Computation amount 1 Sales 7000*125 875000 Less: 2 Variable cost 7000*105 735000 3 Fixed cost Given 90000 4 Depreciation Working Note 50000 5 Profit Before Tax (1-2-3-4) 6 Profit After Tax 7 Depreciation 50000 8 Operating Cash flows 50000 (6+7) Working Note Depreciation Cost of Asset-Salvage value Life of Asset = 200000-0 50000

Computation of Net Present value= Present Value of Inflows(Working Notes)-Present Value of outflows = 169361-200000 = -30639 Working Notes Present Value of Inflows Present value Annuity Year Inflows factor@7% Present Value 50000 50000 50000 50000 Present Value of Inflows A*B 0.935 0.873 0.816 0.763 46729 43672 40815 38145 169361