The Salida Salt Company is considering making a bid to supply the highway department with rock salt to drop on roads in the country during the winter. Management believes that the actual quantity will average 25,000 tons per year. The firm will need an initial $1,500,000 investment in processing equipment to get the project started. The project will last for 5 years. The accounting department has estimated that annual fixed costs will be $300,000 and that variable costs should be $90 per ton of the final product. The new equipment will be depreciated using the straight-line method to $100,000 over the five-year life of the project based on an estimate of the salvage value by the engineering department. The marketing department estimates that the state will grant at a selling price of $130 per ton. The engineering department estimates that the project will need an initial net working capital investment of $90,000. The firm's WACC is estimated to be 12%, and the marginal tax rate is 35%.
(1) Set up a excel worksheet containing all of the relevant information in this problem, and calculate the initial outlay, annual after-tax cash flows, and the terminal cash flow.
The solution is presented in an excel sheet and all calculations for the initial outlay, annual cash flows and terminal cash flows has been included.