Question 11 ABC Corporation has hired you to evaluate a new FOUR year project for the...
Question 11
ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $825,400.00 work cell. Further, it will cost the firm $50,200.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $65,300.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $5,200.00. Finally, the firm will invest $10,200.00 in net working capital to ensure the project has sufficient resources to be successful.
The project will generate annual sales of $917,000.00 with expenses estimated at 37.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 39.00%.
The work cell is estimated to have a market value of $464,000.00 at the end of the fourth year. The firm expects to reclaim 84.00% of the final NWC position.
The cost of capital is 15.00%.
What is the terminal cash flow for the project?
Homework Answers
1)Calculation of depreciation expense and Book value at end of year 4
Depreciation expense = Cost /useful life
= 825400/20
=41270
Total accumulated depreciation over 4 years =41270 *4 = 165080
Book value of cell at end of 4 year = Cost -accumulated depreciation
= 825400 - 165080
= 660320
Gain/(loss) on sale =sale value -Book value
= 464000 - 660320
= - 196320 loss
Tax saving due to loss = Loss on sale *tax rate
= -196320 * 39%
=- 76564.80
After tax sale value= sale value - Tax saving
= 464000 - (-76564.80)
= 464000 + 76564.80
= 540564.80
Calculation of terminal value :
| After tax sale value | 540564.80 |
| Net working capital released (10200*84%) | 8568 |
| Terminal value of project | 549132.80 |
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Question 11
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