Question

22 -

Celsius Corp. is conducting a capital budgeting analysis to decide whether to invest in a new project which has an expected life of 5 years. The following information is available:

• The installed cost of the new equipment is $360,000. Installation will cost an additional $40,000 The equipment will be depreciated using 5-year MACRS depreciation over the 5-year life of the project.

• An initial NOWC investment equal to 10 percent of year 1 sales will also be required.

• The equipment is expected to have a salvage value of $80,000 at the end of the project's life.

• Forecasted sales in year 1 is $600,000 with a gross margin (excluding depreciation) of 40%. Sales is expected to increase 5% per year over the 5-year life of the project.

• Additional NOWC investments equal to 10 percent of the expected increase in sales will also be required each year.

• Interest expense from a loan used to finance the project will result in annual interest payments of $28,000 each year over the 5-year life of the project.

• Celsius has a 21% corporate tax rate.

What is the expected net cash flow after tax (CFAT) in year 1 for the project?

Select one:

a. $203,400

b. $238,200

c. $276,080

d. $298,200

e. none of the above

Answer 1

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

	Computation of initial investment
	cost of the new equipment		360000
	Installation cost		40000
	Total cost of equipment=		400000
	1st year depreciation @20%		80000
i	sales =		600000
ii=i*40%	Gross margin =40%		240000
iii	Depreciation =		80000
iv=ii-iii	Profit before tax =		160000
v=iv*21%	Tax @ 21%		33600
vi=iv-v	Profit after tax =		126400
vii=vi+iii	Operating cash flow =		206400
viii	Working capital =
	600000*5%*10%		3000
ix=vii-viii	Cash flow after tax =		203400
	therefore answer =		203400