1. A company is considering a three-year project that requires an initial fixed asset investment of $1,800,000. The project will be depreciated straight-line to zero over its three year life. The salvage value is negligible. The annual sales and operating expenses are projected to be $1,500,000 and $800,000, respectively. The marginal tax rate for the company is 35%, what is the OCF for this project?
2. Muncie Manufacturing is considering increasing its collection period by 25 days in hopes of attracting additional sales. Muncie currently has annual sales of $500,000. They expect revenues to increase $25,000 per year and expenses to increase by $10,000 per year. Muncie believes that an additional $3,000 will go uncollected each year as a result of this change in policy. This $3,000 loss will have to be replaced each year to keep the account receivable balance at the increased 25-day level. They project that they will be able to collect 90% of the outstanding balance at the end of year 4 (after replacement). Using a 4-year life, 40% tax rate, and 10% required return, is the investment attractive?
This solution helps to do capital budgeting decisions.