The Doraville Machinery Company is planning to expand its current spindle product line. The required machinery would cost $520,000. it is estimated that at the end of year 10 that the machinery can be sold for $50,000. The machinery will be classified as a seven-year MACRS. The building that will house the new production facility would cost $1.5 million. At the end of year 10, it is estimated that the building for $800,000. The building will be depreciated according to a 39-year property class. The land would cost $350,000. At the end of year 10, it is estimated that the land can be sold for $500,000. Working capital of $250,000 for each year of the project would be required by the start of year 1 and all of the working capital will be recovered at the end of the project.
- The product is expected to result in additional sales of $775,000 per year for 10 years
- The annual disbursements for labor, materials, and all other expenses are estimated to be $465,000 for each year.
- The firm's income tax rate is 40%, and any capital gains will be taxed at 35%.
- The firm's MARR is known to be 15% after taxes.
Determine the projected net after-tax cash flows from this investment. Is the expansion justified? A template for the solution is attached.© BrainMass Inc. brainmass.com October 25, 2018, 6:34 am ad1c9bdddf
Calculate Project Cash Flows, NPV and IRR
Revenues generated by a new fad product in each of the next 5 years are forecasted as follows:
Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment.
A. What is the initial investment in the product? Remember working capital.
B. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 40%, what are the project cash flows in each year?
C. If the opportunity cost of capital is 10%, what is the projected NPV
D What is the project IRR
Please see attached template 7-21View Full Posting Details