16-Large Manufacturing, Inc. is considering investing in some new equipment whose data are shown below. The...

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16-Large Manufacturing, Inc. is considering investing in somenew equipment whose data are shown below. The equipment has a3-year class life and will be depreciated by the MACRS depreciationsystem, and it will have a positive pre-tax salvage value at theend of Year 3, when the project will be closed down. Also, some newworking capital will be required, but it will be recovered at theend of the project's life. Revenues and cash operating costs areexpected to be constant over the project's 3-year life. What is theproject's Initial Cash Outlay at time 0? Enter your answer roundedto two decimal places. Do not enter $ or comma in the answer box.For example, if your answer is $12,300.456 then enter as 12300.46in the answer box. WACC 11.0%
Net investment in fixed assets (depreciable basis) $70,000
Required new working capital $10,000
Sales revenues, each year $95,000
Cash operating costs excl. depr'n, each year $30,000
Expected pretax salvage value $9,000
Tax rate 30.0%
18-Using the information from problem 16 on Large Manufacturing,Inc., what is the
Terminal Year Non–Operating Cash Flow at the end of Year 3?Enter your answer
rounded to two decimal places. Do not enter $ or comma in theanswer box. For
example, if your answer is $12,300.456 then enter as 12300.46 inthe answer box.
19-Using the information from problem 16 on Large Manufacturing,Inc., what is the
project’s NPV? Enter your answer rounded to two decimal places.Do not enter $ or
comma in the answer box. For example, if your answer is$12,300.456 then enter as
12300.46 in the answer box.

Answer & Explanation Solved by verified expert

4.1 Ratings (772 Votes)

Time line		0	1	2	3



Cost of new machine		-70000
Initial working capital		-10000
=Initial Investment outlay		-80000

3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Sales			95000	95000	95000
Profits	Sales-variable cost		65000	65000	65000


-Depreciation	=Cost of machine*MACR%		-23331	-31115	-10367	5187

=Pretax cash flows			41669	33885	54633
-taxes	=(Pretax cash flows)*(1-tax)		29168.3	23719.5	38243.1
+Depreciation			23331	31115	10367
=after tax operating cash flow			52499.3	54834.5	48610.1

reversal of working capital					10000

+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				6300
+Tax shield on salvage book value	=Salvage value * tax rate				1556.1
=18. Terminal year after tax cash flows					17856.1

Total Cash flow for the period		-80000	52499.3	54834.5	66466.2
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631
Discounted CF=	Cashflow/discount factor	-80000	47296.66667	44504.91	48599.513
19. NPV=	Sum of discounted CF=	60401.09

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Transcribed Image Text

16-Large Manufacturing, Inc. is considering investing in somenew equipment whose data are shown below. The equipment has a3-year class life and will be depreciated by the MACRS depreciationsystem, and it will have a positive pre-tax salvage value at theend of Year 3, when the project will be closed down. Also, some newworking capital will be required, but it will be recovered at theend of the project's life. Revenues and cash operating costs areexpected to be constant over the project's 3-year life. What is theproject's Initial Cash Outlay at time 0? Enter your answer roundedto two decimal places. Do not enter $ or comma in the answer box.For example, if your answer is $12,300.456 then enter as 12300.46in the answer box. WACC 11.0%Net investment in fixed assets (depreciable basis) $70,000Required new working capital $10,000Sales revenues, each year $95,000Cash operating costs excl. depr'n, each year $30,000Expected pretax salvage value $9,000Tax rate 30.0%18-Using the information from problem 16 on Large Manufacturing,Inc., what is theTerminal Year Non–Operating Cash Flow at the end of Year 3?Enter your answerrounded to two decimal places. Do not enter $ or comma in theanswer box. Forexample, if your answer is $12,300.456 then enter as 12300.46 inthe answer box.19-Using the information from problem 16 on Large Manufacturing,Inc., what is theproject’s NPV? Enter your answer rounded to two decimal places.Do not enter $ orcomma in the answer box. For example, if your answer is$12,300.456 then enter as12300.46 in the answer box.