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    Cash flow estimation

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    We assume that the Kroger Co. is considering a new project. The project has 6 years life. This project requires initial investment of $180 million to construct building, and purchase equipment, and $12 million for shipping & installation fee. The fixed assets fall in the 5 year MACRS class. The salvage value of fixed assets is $25 million. The number of units of the new product expected to be sold in the first year is 870,000 and the expected annual growth rate is 10%. The sales price is $250 per unit and the variable cost is $175 per unit in the first year. The required net operating working capital (NOWC) is 18%. The company is in the 33% tax bracket. The project is assumed to have the same risk as the corporation use the WACC as the discount rate from the attached excel sheet.

    1. Compute the depreciation basis and annual depreciation of the new project.

    2. Estimate annual cash flows for the 6 years.

    3. Draw a time line of the cash flows.

    4. Using the WACC for Kroger company as discount rate, apply capital budgeting
    analysis techniques (NPV, IRR,PI, and Payback Period) to analyze the new project.

    Please see the cash flow estimation template attached.

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    Solution Summary

    The expert examines cash flow estimations. Depreciation basis and annual deprecation of the new projects are determined.