The company is considering a five-year project that will require €1,200,000 for new manufacturing equipment. This equipment is considered industrial machinery and thus qualifies as three-year MACRS schedule (depreciation rates are 33.33% for Year 1, 44.45% for Year 2, 14.81% for Year 3, and 7.41% for Year 4). At the end of the project, the equipment can be sold for 10% of its original cost. The project also requires an initial investment in net working capital of €100,000, all of which will be recovered at the end of the project. The project is expected to generate annual sales of €800,000 with annual costs of €500,000 during five years. The tax rate is 22 percent and the required rate of return is 9 percent.

Instructions: 

1. Complete the pro forma and determine total cash flows for each year of the project’s life.

2. Calculate the following investment criteria for the project: a. Payback period b. Profitability Index c. Internal rate of return d. Net Present Value

3. Explain your decision whether you recommend accepting or rejecting the project. Year 012345 Sales Costs Depreciation EBIT Taxes Net Income Operating Cash Flow Capital Spending Net Working Capital After-tax salvage value Total Сash Flow

Answer rating: 100% (QA)

To calculate the cash flows for each year of the projects life well follow these steps Calculate annual depreciation using the MACRS schedule Calculate Earnings Before Interest and Taxes EBIT Calculat... View the full answer