Compute the FCFs associated with this project. The required equipment would cost $200,000 plus an additional $30,000
Question:
Compute the FCFs associated with this project.
The required equipment would cost $200,000 plus an additional $30,000 in shipping and $10,000 in installation. The machinery could be depreciated under the MACRS system as 3-year property. In addition, inventories would rise by $20,000, while accounts payable would increase by $5,000 and accounts receivables by $5,000. The project is expected to operate for 4 years when it will be terminated. At the end of the project’s life, the equipment is expected to have a salvage value of $25,000. Unit sales are expected to total 100,000 units per year, and the expected sales price is $2.00 per unit during the first year. The selling price will increase by 3% annually with inflation. Cash operating costs for the project are expected to total 60% of sales. Gustav expects the new product to take sales away from his existing business. He estimates a loss of $5,000 per year. The company’s tax rate is 40%. Gustav calculated the company’s cost of capital for you. It is 5%