Depreciation of the Foundry Equipment will be as follows, using the 5 years MACRS depreciation schedule
Depreciation using MACRS 5 year life | ||
Year | Depreciation calculation | Amount |
Year 1 | =4500000*0.2 | 900000 |
Year 2 | =4500000*0.32 | 1440000 |
Year 3 | =4500000*0.192 | 864000 |
Year 4 | =4500000*0.1152 | 518400 |
Year 5 | =4500000*0.1152 | 518400 |
Year | Sales Price per car | Units Sold | Sales Calculation | Sales Amount (in $) | Variable Costs or COGS per car | Variable costs or COGS Calculation | COGS Amount (in $) |
Year 1 | 26000 | 230 | =26000*230 | 59,80,000 | 16000 | =16000*230 | 36,80,000 |
Year 2 | 26000 | 300 | =26000*300 | 78,00,000 | 16000 | =16000*230 | 48,00,000 |
Year 3 | 26000 | 360 | =26000*360 | 93,60,000 | 16000 | =16000*230 | 57,60,000 |
Year 4 | 26000 | 370 | =26000*370 | 96,20,000 | 16000 | =16000*230 | 59,20,000 |
Year 5 | 26000 | 330 | =26000*330 | 85,80,000 | 16000 | =16000*230 | 52,80,000 |
All amounts in US $, in thousands (rounded) | |||||||
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |||
Sales Revenue | 5,980 | 7,800 | 9,360 | 9,620 | 8,580 | ||
Less : COGS | 3,680 | 4,800 | 5,760 | 5,920 | 5,280 | ||
Less : Fixed Cost | 1,100 | 1,100 | 1,100 | 1,100 | 1,100 | ||
Less : Depreciation | 900 | 1,440 | 864 | 518 | 518 | ||
EBIT | 300 | 460 | 1,636 | 2,082 | 1,682 | ||
Less : Taxes @30% | 90 | 138 | 491 | 624 | 504 | ||
Net Income | 210 | 322 | 1,145 | 1,457 | 1,177 | ||
Add : Depreciation | 900 | 1,440 | 864 | 518 | 518 | ||
Operating Cash flows | 1,110 | 1,762 | 2,009 | 1,976 | 1,696 |
Hence, the operating cash flows for first year are $1,100,000.
Now to calculate the NPV, we need to find the gain/loss on sale of equipment
Book value of the equipment after 5 years = 4,500,000- sum of depreciation for 5 years (from above table )
= $ 259200
Salvage value at the end of 5 years = $500,000
Gain on the sale of equipment = $240,800
Tax on gain on sale of equipment = 0.3*$240,800= $72,240
After tax cash flow on disposal = $500,000 - $72,240 = $427,760
The incremental cash flows have been mentioned below
Incremental Cash Flow, in US $, in thousands (rounded) | ||||||||
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |||
Investment | -4,500 | |||||||
Change in Net working capital | -500 | 500 | ||||||
Operating Cash flows | 1,110 | 1,762 | 2,009 | 1,976 | 1,696 | |||
After tax salvage value | 428 | |||||||
Total Incremental Cash Flows | -5,000 | 1,110 | 1,762 | 2,009 | 1,976 | 2,623 |
To calculate NPV, we need the discount rate, which I am assuming would be a part of the next sub question. You will need to discount it using the same discount rate to find the NPV.
Hope this helps ! :)
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