Question

Q-Search in Document . Home 2+ Share A Insert Design Layout References Calibri (Body) 12 AA A B IV.abe X2 x A A Mailings A Review View E = 33 = Documents Acrobat Picture Format = 2+ 1 AaBbCcDdEe $. Paste Aa Bbccdee AaBbCcDc AabCcDdE: AaBbc AabhCeDdEx No Spacing Heading 1 Heading 2 Tile Subtitle Normal Styles Pane Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $1 million and which it currently rents out for $132,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.3 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to terminate the project at the end of eight years and to sell the machines and equipment for $544,000. Finally, the project requires an initial investment into networking capital equal to 10 percent of predicted first-year sales. Subsequently, net working capital is 10 percent of the predicted sales over the following year. Sales of protein bars are expected to be $4.8 million in the first year and to stay constant for eight years. Total manufacturing costs and operating expenses (excluding depreciation) are 80 percent of sales, and profits are taxed at 30 percent. a. What are the free cash flows of the project? b. If the cost of capital is 15%, what is the NPV of the project? a. What are the free cash flows of the project? The FCF for year is $ - 1.780 million. (Round to three decimal places.) The FCF for years 1-7 is $.6186 million. (Round to three decimal places.) The FCF for year 8 is $ million. (Round to three decimal places.) Page 1 of 1 O words English (United States) E E E - + 245%

Answer 1

Operating cash flow (OCF) each year = income after tax + depreciation

The sales are constant over the 8 years, therefore no additional working capital investment is required in the subsequent years.

In year 8, the entire working capital investment is recovered.

profit on sale of equipment at end of year 4 = sale price - book value

book value = original cost - accumulated depreciation

after-tax salvage value = salvage value - tax on profit on sale of equipment   

NPV is calculated using NPV function in Excel

NPV is $1,302,752

в с о E F G H I J 0 1 2 3 4 5 6 7 8 2 Initial Investment 3 Cost of equipment 4 Investment in working capital $1,300,000 $480,000 6 OCE 7 Revenues 8 - Costs 9 - Depreciation 10 -Loss of warehouse rent 11 Incremental earnings before tax 12 - Taxes 13 Incremental earnings after tax 14 + Depreciation 15 OCF $4,800,000 $4,800,000 $3,840,000 $3,840,000 $130,000 $130,000 $132,000 $132,000 $698,000 $698,000 $209,400 $209,400 $488,600 $488,600 $130,000 $130,000 $618,600 $618,600 $4,800,000 $4,800,000 $3,840,000 $3,840,000 $130,000 $130,000 $132,000 $132,000 $698,000 $698,000 $209,400 $209,400 $488,600 $488,600 $130,000 $130,000 $618,600 $618,600 $4,800,000 $3,840,000 $130,000 $132,000 $698,000 $209,400 $488,600 $130,000 $618,600 $4,800,000 $4,800,000 $3,840,000 $3,840,000 $130,000 $130,000 $132,000 $132,000 $698,000 $698,000 $209,400 $209,400 $488,600 $488,600 $130,000 $130,000 $618,600 $618,600 $4,800,000 $3,840,000 $130,000 $132,000 $698,000 $209,400 $488,600 $130,000 $618,600 16 17 Terminal Cash Floy 18 Salvage Value 19 Accumulated depreciation 20 Book value of equipment 21 Tax 22 Salvage Value after tax 23 Recovery of working capital 24 Terminal Cash Flow $544,000 $1,040,000 $260,000 $85,200 $458,800 $480,000 $938,800 ($1,780,000) $618,600 $618,600 $618,600 $618,600 $618,600 $618,600 $618,600 $1,557,400 26 NPV Analysis 27 FCF 28 29 NPV $1,302,752