company has decided to produce a new line of television/electronic media
player. You estimate that your company will sell 51,000 per year, and
that this product will sell for $750 each. The plant and equipment (new
fixed assets) needed to manufacture this product costs $22,400,000 and will be
depreciated on a straight-line basis over the seven year project.
Additional manufacturing costs to produce the media players would total
$16,980,000 each year. The tax rate is 40%.
Sketch a simplified
income statement and calculate the firm’s operating cash flow. That is,
explain what goes on each line of the income statement.
production project will generate an expected operating cash flow of $50,000 per
year for 4 years (years 1 – 4). Undertaking the project will require an
increase in the company’s net working capital (inventory) of $10,000 today
(year 0). At the end of the project (year 4), inventory will return to
the original level. The project would cost $150,000. The weighted
average cost of capital for the firm is 9%.
Sketch a timeline (explain
what amount is considered in each year of the timeline) to illustrate the
relevant cash flows. What is the net present value of this project?