Question

Smith and Sons Inc. Are determining the viability of a new product line. The new Product will Require a $280,000 piece of equipment. Shipping and installation will cost $20,000. The equipment has a 3-year tax life, and the allowed depreciation for such property are 33%, 45%, 15%, and 7% for years 1 through 4. Inventory will increase by $15,000, account payable increasing by $8,000 and account receivables increasing by $10,000. The Product line is expected to generate annual revenue of $106,000 per year, with cost of goods sold being 36,000 per year and other costs (Excluding Depreciation) of $12,000 per year. The Tax rate is 30 Percent, Annual interest expense is $11,000 per year, and the required return for this project is 12 Percent.

find the year 0 cash flow, FCF0

Find the year 2 cash flow, FCF2

Please show all work

Answer 1

rate positively .. let me know if you need any clarification..

	Computation of depreciation =
	Total cost = 280,000+20,000		300000
	year	1	2	3
	Depreciation rate	33.00%	45.00%	15.00%
	Depreciation amt	99,000	135,000	45,000
	change in working capital
	inventory	15000
	Account payable	-8000
	Account receivable	10000
	Net working capital	17000
	Computation of NPV
	year	0	1	2
a	initial investment	(300,000)
b	Working capital	(17,000)
A	Initial investment	(317,000)
	operating cash flow
i	Revenue		106,000	106,000
ii	Cost =36000+12000		48,000	48,000
iii	depreciation		99,000	135,000
iv=i-ii-iii	Profit before tax		(41,000)	(77,000)
v=iv*30%	Tax@ 30%		(12,300)	(23,100)
vi=iv-v	Profit after tax		(28,700)	(53,900)
B=vi+iii	operating cash flow		70,300	81,100
	Year 0 Cash flow =	(317,000)
	Year 2 cash flow =	81,100