Blue Ocean already spent $85,000 on a feasibility study for a machine that will produce a...

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Blue Ocean already spent $85,000 on a feasibility study for amachine that will produce a new product. The machine will cost$2,575,000 and it will require modifications costing an additionalamount of $365,000. Blue Ocean will need to invest $75,000 foradditional inventory. The project will last for 7 years and themachine will be depreciate using straight line method with noresidual value.
This machine is expected to produce an output of 20,000 unitsannually with the estimated selling price of $100. Operatingvariable cost will be 25% of revenues, operating fixed cost isestimated to be $400,000. Additional administrative expense isabout $200,000. Blue Ocean's tax rate is 30%.
a. Calculate the project's initialinvestment
b. Calculate the project's annualcash flows from year 1 to year 5.

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Calculation of initial investment Cost of machine 2575000 Required modifications cost 365000 Investment in Inventories 75000 3015000 So initial See Answer

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Blue Ocean already spent $85,000 on a feasibility study for amachine that will produce a new product. The machine will cost$2,575,000 and it will require modifications costing an additionalamount of $365,000. Blue Ocean will need to invest $75,000 foradditional inventory. The project will last for 7 years and themachine will be depreciate using straight line method with noresidual value.This machine is expected to produce an output of 20,000 unitsannually with the estimated selling price of $100. Operatingvariable cost will be 25% of revenues, operating fixed cost isestimated to be $400,000. Additional administrative expense isabout $200,000. Blue Ocean's tax rate is 30%.a. Calculate the project's initialinvestmentb. Calculate the project's annualcash flows from year 1 to year 5.