Standard Food Company plans to establish a new production line for producing ice creams. The equipment costs
Question:
Standard Food Company plans to establish a new production line for producing ice creams. The equipment costs $2,500,000 with a 10-year life. For depreciation the company is using MACRS method. The project is expected to generate $ 1,050,000 sales in the first year and the sales is expected to grow by 5% every year afterwards. The annual fixed expense is $ 100,000 per year, and the variable cost is always 35% of the sales of the same year. Starting at year 0, the company needs to maintain an inventory that is worth 15% of next years sale. At the end of the project, no inventory needs to be maintained and all existing inventories will be liquidated. The tax rate is 25% for capital gains and net income. The cost of capital (minimum required return) is 12% for the company, while the firm is paying $10,000 interest to every year debt holders as financing cost. Three years before the project starts, the company spent $40,000 for marketing research.
- Create a capital budgeting table with the calculation of Free Cash Flows for each year of the project.