Capital Budgeting: Present Value

** Please see the attached file for the correct formatting **

Caledonia Products

Your boss would like you to look at a new project. This project involves the purchase of a new plasma cutting tool that can be used in its metal works division. The products manufactured using the new technology are expected to sell for an average price of $300 per unit, and the company analyst expects the firm can sell 20,000 units per year at this price for a period of 5 years. To get into this business will require the purchase of a $2 million piece of equipment that has a residual or salvage value in five years of $200,000. In addition, the firm expects to have to invest an additional $300,000 in working capital to support the new business. Other pertinent information concerning the business venture is:

Given
Initial cost of equipment $2,000,000
Project and equipment life 5
Salvage value of equipment $200,000 Note tax adjust at tax rate
Working capital requirement $300,000
Depreciation method Straight-Line
Depreciation expense $400,000
Discount rate 12.00%
Tax rate 30.00%

Further analysis was performed to define the expected, worst, and best scenarios as:

Probability 40% 25% 35%
Base Case Worst Case Best Case
Assumptions:
Unit Sales 20,000 15,000 25,000
Price Per unit $300.00 $250.00 $330.00
Variable Cost per unit $200.00 $210.00 $180.00
Cash fixed Costs per year $500,000.00 $450,000.00 $350,000.00
Depreciation $400,000.00 $400,000.00 $400,000.00

Solution -- Cash Flow From Operations:
Revenues
Less: Variable Cost
Less: Fixed Expenses
Gross margin

Less: Depreciation
Net Operating Income

Less: Income tax expense
Net income

Add Back Depreciation
Cash Flow From Operations

Base Case Working
Year Initial Outlay Capital Operating Cash Salvage
0
1
2
3
4
5

Worst Case Working
Year Initial Outlay Capital Operating Cash Salvage
0
1
2
3
4
5

Best Case Working
Year Initial Outlay Capital Operating Cash Salvage
0
1
2
3
4
5