The Datum Co. has recently completed a $200,000, two-year marketing study. Based on the results of the study, Datum has estimated that 6,000 units of its new electro-optical data scanner could be sold annually over the next 8 years, at a price of $8,000 each. Variable costs per unit are $4,400, and fixed costs total $5.4 million per year.
Start-up costs include $17.6 million to build production facilities, $1.5 million for land, and $4 million in net working capital. The $17.6 million facility will be depreciated on a straight-line basis to a value of zero over the eight-year life of the project. At the end of the project's life, the facilities (including the land) will be sold for an estimated $4.7 million. The value of the land is not expected to change during the eight year period.
Finally, start-up would also entail tax-deductible expenses of $0.4 million at year zero. Datum is an ongoing, profitable business and pays taxes at a 35% rate on all income and capital gains. Datum has a 20% opportunity cost for projects such as this one.
What is the terminal year cash flow?
The year 8 operating cash flow will be $11.3 million, as determined in Problem 1. Additional calculations are necessary in order to determine the capital requirements.
First, the company will sell the land for $1.5 million.
Second, the plant and equipment will be sold for ($4.7 million - $1.5 million) = $3.2 million. The plant and equipment will be depreciated to a book ...
The solution calculates the IRR, terminal year cash flow, and net present value of the project.