Question

1.The equipment cost (equipment plus shipping and installation) can be depreciated at the rate of 48% the first year. The remaining 5 years (years 2-6) the depreciation will be equal to $30,000 per year. What is the amount of depreciation in year 1?

2. Consider the following capital budgeting and cash flow estimation problem. You have developed a new energy drink that uses various vegetables. The drink is called V-DRINK. You have an existing building that you are using to produce V-DRINK. The building is fully depreciated. You determine a need to buy $400,000 in equipment. Shipping and installation is an additional $50,000. Additionally you determine you will need to have $15,411 in inventory. What is the total initial outlay associated with the project?

3.Based on some market research you expect to sell around 200,000 bottles of V-Drink a year at wholesale price of $2.3. Operating costs (excluding depreciation) are expected to be 50% of revenue. The firms tax rate is 40%. What is the annual operating cash flow associated with this project in year 2. (Note you will need to factor in $30,000 in depreciation in year 2 from the prior question).

Answer 1

Answer 1.

Depreciation in Year 1 = 48% of Equipment Cost
Depreciation in Year 2 - Year 6 = 52% of Equipment Cost

Depreciation in Year 2 - Year 6 = 5 * $30,000
52% of Equipment Cost = $150,000
Equipment Cost = $288,462

Depreciation in Year 1 = 48% * $288,462
Depreciation in Year 1 = $138,462

Answer 2.

Equipment Cost = Equipment + Shipping and Installation
Equipment Cost = $400,000 + $50,000
Equipment Cost = $450,000

Initial Outlay = Equipment Cost + Investment in NWC
Initial Outlay = -$450,000 - $15,411
Initial Outlay = -$465,411

Answer 3.

Revenue = Selling Price per bottle * Sales Volume
Revenue = $2.30 * 200,000
Revenue = $460,000

Operating Costs = 50% * Revenue
Operating Costs = 50% * $460,000
Operating Costs = $230,000

Operating Cash Flow = (Revenue - Operating Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($460,000 - $230,000) * (1 - 0.40) + 0.40 * $30,000
Operating Cash Flow = $150,000