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Project cash flow and NPV.The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds? (1957 replicas)....

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Finance

Project cash flow and NPV.The managers of Classic AutosIncorporated plan to manufacture classic Thunderbirds? (1957replicas). The necessary foundry equipment will cost a total of?$4,200,000 and will be depreciated using a? five-year MACRS?life,LOADING.... Projected sales in annual units for the next fiveyears are 290 per year. If the sales price is $25,000 per? car,variable costs are ?$16,000 per? car, and fixed costs are?$1,200,000 ?annually, what is the annual operating cash flow ifthe tax rate is 38?%? The equipment is sold for salvage for?$525,000 at the end of year five. What is the? after-tax cash flowof the? salvage? Net working capital increases by ?$575,000 at thebeginning of the project? (year 0) and is reduced back to itsoriginal level in the final year. What is the incremental cash flowof the? project? Using a discount rate of 12% for the? project,determine whether the project should be accepted or rejectedaccording to the NPV decision model.

?First, what is the annual operating cash flow of the projectfor year? 1?

MACRS Fixed Annual Expense Percentages by RecoveryClass?????????

??Year

?3-Year

?5-Year

?7-Year

?10-Year

????1

?33.33%

?20.00%

?14.29%

?10.00%

????2

?44.45%

?32.00%

?24.49%

?18.00%

????3

?14.81%

?19.20%

?17.49%

?14.40%

????4

? 7.41%

?11.52%

?12.49%

?11.52%

????5

?11.52%

?8.93%

?9.22%

????6

? 5.76%

?8.93%

?7.37%

????7

?8.93%

?6.55%

????8

?4.45%

?6.55%

????9

?6.55%

??10

?6.55%

??11

?3.28%

Answer & Explanation Solved by verified expert
4.0 Ratings (712 Votes)

Time line 0 1 2 3 4 5
Cost of new machine -4200000
Initial working capital -575000
=Initial Investment outlay -4775000
5 years MACR rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%
Unit sales 290 290 290 290 290
Profits =no. of units sold * (sales price - variable cost) 2610000 2610000 2610000 2610000 2610000
Fixed cost -1E+06 -1200000 -1200000 -1200000 -1200000
-Depreciation =Cost of machine*MACR% -840000 -1344000 -806400 -483840 -483840 241920 =Salvage Value
=Pretax cash flows 570000 66000 603600 926160 926160
-taxes =(Pretax cash flows)*(1-tax) 353400 40920 374232 574219.2 574219.2
+Depreciation 840000 1344000 806400 483840 483840
=after tax operating cash flow 1193400 1384920 1180632 1058059.2 1058059.2
reversal of working capital 575000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 325500
+Tax shield on salvage book value =Salvage value * tax rate 91929.6 =417429.6=after tax salvage value
=Terminal year after tax cash flows 992429.6
Total Cash flow for the period (incremental) -4775000 1193400 1384920 1180632 1058059.2 2050488.8
Discount factor= (1+discount rate)^corresponding period 1 1.12 1.2544 1.404928 1.5735194 1.7623417
Discounted CF= Cashflow/discount factor -4775000 1065536 1104050 840350.54 672415.75 1163502.4
NPV= Sum of discounted CF= 70854.15881

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Transcribed Image Text

Project cash flow and NPV.The managers of Classic AutosIncorporated plan to manufacture classic Thunderbirds? (1957replicas). The necessary foundry equipment will cost a total of?$4,200,000 and will be depreciated using a? five-year MACRS?life,LOADING.... Projected sales in annual units for the next fiveyears are 290 per year. If the sales price is $25,000 per? car,variable costs are ?$16,000 per? car, and fixed costs are?$1,200,000 ?annually, what is the annual operating cash flow ifthe tax rate is 38?%? The equipment is sold for salvage for?$525,000 at the end of year five. What is the? after-tax cash flowof the? salvage? Net working capital increases by ?$575,000 at thebeginning of the project? (year 0) and is reduced back to itsoriginal level in the final year. What is the incremental cash flowof the? project? Using a discount rate of 12% for the? project,determine whether the project should be accepted or rejectedaccording to the NPV decision model.?First, what is the annual operating cash flow of the projectfor year? 1?MACRS Fixed Annual Expense Percentages by RecoveryClass???????????Year?3-Year?5-Year?7-Year?10-Year????1?33.33%?20.00%?14.29%?10.00%????2?44.45%?32.00%?24.49%?18.00%????3?14.81%?19.20%?17.49%?14.40%????4? 7.41%?11.52%?12.49%?11.52%????5?11.52%?8.93%?9.22%????6? 5.76%?8.93%?7.37%????7?8.93%?6.55%????8?4.45%?6.55%????9?6.55%??10?6.55%??11?3.28%

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