Rex inc currently has one product, low-priced stoves. Rex Inc has decied to sell a new...

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Rex inc currently has one product, low-priced stoves. Rex Inchas decied to sell a new line of medium-priced stoves. Sales forthe new line of stoves are estimated at 6 million a year. Variablecosts are 70% of sales.The project is expected to last 10 years. Inaddition to the production variable costs, the fixed costs eachyear will be 1,000,000. The company has spent $1,000,000 inresearch and a marketing study that determined the company willlose 800,000 in sales a year of its existing low-priced stoves.Theproduction variable cost of the existing low-priced stoves is500,000 a year. The plant and equipment required for producing thenew line of stoves costs 2,000,000 and will be depreciated down tozero over 20 years using straight line depreciation. It is expectedthat the plant and equipment can be sold (market or scrap value)for $500,000 at the end of 10 years. The new stoves will alsorequire today an increase in net working capital of $400,000 thatwill be returned at the end of the project. The tax rate is 25percent and the cost of capital is 10%.
7 part question
What is the initial outlay for this project?
What is the annual EBITDA for this project?
What is the annual taxable income for this project?
What is the annual net income for this project?
What is the operating Cashflow for this project?
What is the remaining book value for the plant at equipment atthe end of the project?
What is the termination value for this project?

Answer & Explanation Solved by verified expert

3.7 Ratings (325 Votes)

1)	Cost of plant and equipment	$ 20,00,000
	Increase in NWC	$ 4,00,000
	Initial outlay for the project	$ 24,00,000
2)	Sales for the new line of stoves	$ 60,00,000
	Variable costs [70%]	$ 42,00,000
	Fixed costs	$ 10,00,000
	EBITDA for the new stove	$ 8,00,000
	Loss of EBITDA on existing stoves [800000-500000]	$ 3,00,000
	EBITDA for the project	$ 5,00,000
3)	EBITDA for the project	$ 5,00,000
	Less: Depreciation [2000000/20]	$ 1,00,000
	Annual taxable income for the project	$ 4,00,000
4)	Less: Tax at 25%	$ 1,00,000
	Annual net income	$ 3,00,000
5)	Add: Depreciation	$ 1,00,000
	Annual operating cash flow for the project	$ 4,00,000
6)	Remaining book value = 2000000-1000000 =	$ 10,00,000
7)	Salvage value of the plant	$ 5,00,000
	Loss on sale	$ 5,00,000
	Tax shield on loss at 25%	$ 1,25,000
	After tax salvage value = 500000+125000 =		$ 6,25,000
	Add: Recapture of NWC		$ 4,00,000
	Termination value for the project		$ 10,25,000

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Transcribed Image Text

Rex inc currently has one product, low-priced stoves. Rex Inchas decied to sell a new line of medium-priced stoves. Sales forthe new line of stoves are estimated at 6 million a year. Variablecosts are 70% of sales.The project is expected to last 10 years. Inaddition to the production variable costs, the fixed costs eachyear will be 1,000,000. The company has spent $1,000,000 inresearch and a marketing study that determined the company willlose 800,000 in sales a year of its existing low-priced stoves.Theproduction variable cost of the existing low-priced stoves is500,000 a year. The plant and equipment required for producing thenew line of stoves costs 2,000,000 and will be depreciated down tozero over 20 years using straight line depreciation. It is expectedthat the plant and equipment can be sold (market or scrap value)for $500,000 at the end of 10 years. The new stoves will alsorequire today an increase in net working capital of $400,000 thatwill be returned at the end of the project. The tax rate is 25percent and the cost of capital is 10%.7 part questionWhat is the initial outlay for this project?What is the annual EBITDA for this project?What is the annual taxable income for this project?What is the annual net income for this project?What is the operating Cashflow for this project?What is the remaining book value for the plant at equipment atthe end of the project?What is the termination value for this project?