The equipment would cost $300,000, plus a shipping cost of $20,000 and $22,000 in installation fees. This
Question:
The equipment would cost $300,000, plus a shipping cost of $20,000 and $22,000 in installation fees. This equipment has an economic life of 4 years, and the company's accountingdepartment has noted that this equipment is classified for aMACRS 3-year class. The machinery is expected to have a salvage value of $15,000 after 4 years of use.
The marketing department has provided the following 4-year sales forecast for the new products made from this equipment. The price and the cost per unit is given below:
Four Year Sales Forecast
| Description | Year 1 | Year 2 | Year 3 | Year 4 |
|---|---|---|---|---|
| Units | 1,500 | 1,575 | 1,605 | 1,626 |
| Sales Price per Unit | $240 | $252 | $264 | $276 |
| Unit Cost | $100 | $105 | $110 | $115 |
The sales price and cost are expected to increase by 4.8% per year due to inflation. Further, to handle the new line, the firm's net working capital would have to increase by an amount equal to 12% of sales revenues. The firm's tax rate is 42%, and its overall weighted average cost of capital is 12.8%.
| Equipment Cost | $300,000 |
| Shipping Charge | $20,000 |
| Installation Charge | $22,000 |
| Economic Life | 4 |
| Salvage Value | $15,000 |
| Tax Rate | 42.0% |
| Cost of Capital | 12.8% |
| Net Working Capital/Sales | 12.0% |
Depreciable Basis = Equipment + Freight + Installation
Depreciable Basis = $342,000
| Year | % | Basis | Depreciation (% x Basis) | Remaining Book Value |
|---|---|---|---|---|
| 1 | 0.3333 | $342,000 | $113,989 | $228,011 |
| 2 | 0.4445 | $342,000 | $152,019 | $75,992 |
| 3 | 0.1481 | $342,000 | $50,650 | $25,342 |
| 4 | 0.0741 | $342,000 | $25,342 | $0 |
Write a 1,050 to 1,400-word analysis in which you do the following:
- Construct annual incremental operating cash flow statements for the next 4 years.
- Calculate the net present value (NPV) based on your projected cash flows.
- Provide rationale explaining why Custom Molds & Casting Company should purchase this equipment.
- Discuss what other factors you need to consider in your decision.
- Conduct a sensitivity analysis.
Assume that the new product line is expected to decrease sales of the firm's other lines by $50,000 per year. Should this be considered in the analysis? Why or why not? If so, how?
Expert Answer:
Annual Incremental Cash Flow Statements Year 1 Sales Revenue 1500 240 360000 Variable Costs 1500 100 150000 Contribution Margin 210000 Fixed Costs Dep... View the full answer
Corporate Finance A Focused Approach
ISBN: 978-1305637108
6th edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
