Question

Problem 1 Sugar Land Company is considering adding a new line to its product mix and the capital budgeting analysis is being conducted by a MBA student. The production line would be set up in urused space (Market Value Zero) in Sugar and main plant. Total cost of the machine is $300,000. The machinery has an economic if of 4 years and will be deprecated using MACRS for 3 year property dess. The machine will have a salvage value of $35.000 after 4 year The wine will generale Sales of 1.500 units per year for 4 years and the variable cost per unit is $100 in the first year Each unit can be sold for $200 in the first year. The sale price and Variable cost respected to increase by 3% per year due to intation. Further, to handle the new line them's not working capital would have to increase by $30.000 of meer (No change in NWC in years through and the NWC will be recouped in year 4). The firm's tax rate is 40% and its weighted average cost of capital is 11%

Answer 1

1.

	YEAR1	YEAR2	YEAR 3	YEAR4
Sale	$300,000	$309,000	$318,270	$327818.1
Variable Cost	150,000	154500	159135	163909.1
Depreciation	99990	133350	44430
EBIT	50010	21150	114705	163909.1
Tax (40% of EBIT)	20004	8460	45882	65563.62
Net Income(EBIT-Tax)	30006	12690	68823	98345.43
Depreciation	99990	133350	44430	0
OCF(NI+Dep)	129996	146040	113253	98345.43

2. Estimate after Tax salvage value:

Cost= 300,000

Accumlate Depreciation: 277770

Book value =300,000-277,770=22230

Salvage Value = 35,000 - 40%(22230)=35000-8892 =26108

3.

	Year 0	Year 1	Year 2	Year 3	Year 4
OCF	-300,000	129996	146040	113253	98345.43

Salvage Value					26108
NET Cash Flow	-300,000	129996	146040	113253	124453.4