Question

3. Project cash flow and NPV. The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds (1957 replicas). The necessary foundry equipment will cost a total of $4,000,000 and will be depreciated using a five-year MACRS life, The sales manager has an estimate for the sale of the classic Thunderbirds. The annual sales volume will be as follows: Year one: 240 Year two: 290 Year three: 330 Year four: 350 Year five: 300 If the sales price is $26,000 per car, variable costs are $18,000 per car, and fixed costs are $1,400,000 annually, what is the annual operating cash flow if the tax rate is 30%? The equipment is sold for salvage for $500,000 at the end of year five. Net working capital increases by $500,000 at the beginning of the project (year 0) and is reduced back to its original level in the final year. Find the internal rate of return for the project using the incremental cash flows. First, what is the annual operating cash flow of the project for year 1? (Round to the nearest dollar.) What is the annual operating cash flow of the project for year 2? (Round to the nearest dollar.) What is the annual operating cash flow of the project for year 3? (Round to the nearest dollar.) What is the annual operating cash flow of the project for year 4?

Answer 1

Classic Autos	0	1	2	3	4	5
Quantity		240	290	330	350	300
MACRS %		20.00%	32.00%	19.20%	11.52%	11.52%	5.76%
Investment	$ (4,000,000)						$ 230,400.00
Salvage						$     500,000
NWC	$     (500,000)					$     500,000
Sales		$ 6,240,000	$ 7,540,000	$ 8,580,000	$ 9,100,000	$ 7,800,000
VC		$(4,320,000)	$(5,220,000)	$(5,940,000)	$(6,300,000)	$(5,400,000)
FC		$(1,400,000)	$(1,400,000)	$(1,400,000)	$(1,400,000)	$(1,400,000)
Depreciation		$    (800,000)	$(1,280,000)	$    (768,000)	$    (460,800)	$    (460,800)
EBT		$    (280,000)	$    (360,000)	$     472,000	$     939,200	$     539,200
Tax (30%)		$       84,000	$     108,000	$    (141,600)	$    (281,760)	$    (161,760)
Profits		$    (196,000)	$    (252,000)	$     330,400	$     657,440	$     377,440
Cash Flows	$ (4,500,000)	$     604,000	$ 1,028,000	$ 1,098,400	$ 1,118,240	$ 1,757,360
IRR	6.75%

Depreciation = Investment x MACRS %

Book Value of asset after 5 years = Investment x (1 - accumulated depreciation) = 4,000,000 x 5.76% = 230,400

Operating Cash Flow (OCF) = Profits + Depreciation

Incremental Cash Flows = OCF + INvestment + NWC + (Salvage - BV) x (-Tax Rate) + Salvage

IRR can be calculated using the same function in excel

IRR = 6.75%