Question

engineering economics

1) A chemical processing firm is planning on adding a duplicate polyethylene plant at another location. The financial information for the first project year is shown in Table (a) Compute the working-capital requirement during the project period. (b) What is the taxable income during the project period? (c) What is the net income during the project period? (d) Compute the net cash flow from the project during the first year. Financial Information for First Project Year Sales $ 1,500,000 Manufacturing costs Direct materials 150,000 Direct labor 200,0 00 Overhead 100,0 Depreciation 200,0 150,000 400,000 200,000 100,000 20,000 Operating expenses Equipment purchase Borrowing to finance equipment Increase in inventories Decrease in accounts receivable Increase in wages payable Decrease in notes payable Income taxes Interest payment on financing 30,000 40,000 272,000 20,000

Answer 1

A. working capital requirement = increase in current assets - increase in current liabilities

Increase in current assets = increase in inventory - decrease in accounts receivable, 80,000

Increase in current liabilities = increase in wage payable - decrease in notes payable, - 10,000

Working capital requirement = 80,000 + 10000=$ 90,000

B. Sales - manufacturing overhead - operating expenses - interest payment on financing

1500,000 - 650,000 - 150,000 - 20,000 = $680,000

Taxable income is $680,000

C. Net income = taxable income - tax expenses

680,000-272000= $408,000

D. Cash flow from operations

Net earnings 408,000

Add to cash

Depreciation 200,000

Decrease in accounts receivable 20,000

Increase in wages payable 30,000. .250,000

Subtraction from cash

Income tax paid 272,000

Interest paid 20,000

Increase in inventory 100,000

Decrease in accounts payable 40,000 (332,000)

Net cash flow from operations $326,000

Cash flow from investing

Equipment (200,000)

Cash flow from financing

Borrowing 200,000

Net cash flow 326,000-200,000+200,000 =$ 326,000