ABC is considering adding a new line to its product mix, and you are conducting the capital budgeting analysis for this proposed project. The production line would be set up in unused space in the firm's main plant. The machinerys invoice price would be approximately $350,000, another $15,000 in shipping charges would be required, and it would cost an additional $25,000 to install the equipment. The machinery has an economic life of 4 years, and the firm has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use.

The new line would generate incremental sales of 1,500 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 2% per year, though no other variable is expected to change. Further, to handle the new line, the firms net working capital would have to increase in the first year of operation by an amount equal to 12% of sales revenues. The firms tax rate is 21%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 14%.

a Fill in the missing information

Equipment cost $350,000

Shipping charge $15,000

Installation charge $25,000

Economic Life

Salvage Value

Tax Rate

Cost of Capital

Units Sold

Sales Price Per Unit

Incremental Cost Per Unit

NWC/Sales

b.Fill in the operating data in the table:

Annual Operating Cash Flows

Year 1 Year 2 Year 3 Year 4

Units

Unit price

Unit cost

Sales

Costs

Depreciation

Operating income before taxes (EBIT)

Taxes

EBIT (1 T)

Depreciation

Net operating CF (OCF)

c.

Estimate the required net working capital for each year, and the cash flow due to investments in net working capital.

Annual Cash Flows due to Investments in Net Working Capital

Year 0 Year 1 Year 2 Year 3 Year 4

Sales

NWC (% of sales)

CF due to investment in NOWC)

Please show all your calculationsThanks