PowerSell has developed a new and efficient lithium-ion battery for use in electric vehicles and plans to
Question:
PowerSell has developed a new and efficient lithium-ion battery for use in electric vehicles and plans to sell the batteries to major auto manufacturers. It will cost $12,000,000 at Year 0 to buy the equipment necessary to manufacture the novel batteries. In year 1, the batteries would sell for $9,000 per unit, have a fixed cost of $3,000 per unit, and have a variable cost of $2,000 per unit. After Year 1, the sales price, fixed costs, and variable costs will increase at the inflation rate of 8% per year. Analysts believe PowerSell could sell 1,000 units in year 1 and expect a 10% growth rate in units sold each year. The battery project will have a life of 4 years and the initial equipment purchase will be depreciated over a 4-year period, using MACRS rates as shown below:
Year | Rate |
---|---|
1 | 20.00% |
2 | 32.00% |
3 | 19.20% |
4 | 11.52% |
5 | 11.52% |
6 | 5.76% |
The estimated market value of the equipment at the end of the project's 4-year life is $2,500,000. PowerSell's tax rate is 25% and its cost of capital is 10%. Company analysts suggest that net working capital at the beginning of each year equal to 10% of the next year's projected sales. Note to reference cells in all calculations.
Required :
- Calculate the sales revenues for each year. (15 Points)
- Note the units sold in year 1 and the growth rate
- The sales price, variable cost, and non-variable cost increase each year by the inflation rate
- NOWCt= (10%)(Salest+1)
- Calculate the net cash flow due to salvage. (15 Points)
- Annual depreciation expense = (Basis for depreciation) (Annual depreciation rate)
- Ending Book Value = Previous book value - Current annual depreciation expense
- Profit (or loss) on salvage = Salvage value - Ending book value
- Tax on profit (or loss) = Profit (or loss) on salvage * Tax rate
- Net cash flow due to salvage = Salvage value - Tax on profit (or loss)
Intermediate Accounting
ISBN: 978-1119048541
11th Canadian edition Volume 2
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Nicola M. Young, Irene M. Wiecek, Bruce J. McConomy