financial management
The firm is considering investing in a capital project; new production line equipment that will have an initial cost of $12 million. The equipment will have a productive life of 5 years, and at the end of this period, it is expected to have a salvage value of $2 million (meaning the firm can sell the used equipment for $2 million). The equipment will be depreciated using the straightline method for the full 5 years. The new production equipment will supplement existing operations. The project is expected to increase revenue for the firm by $10 million per year and increase operating expenses by $6.5 million per year. First, you need to calculate the annual depreciation on the new equipment; this depreciation figure is needed to calculate the cash flow generated by the project. Utilize the following table:
Now, you need to calculate the relevant cash flows for the project. You can assume that the firm’s weighted average cost of capital (WACC) is 8%. The firm pays a 29% average tax rate. Utilize the following table:
Calculate the present values of each relevant cash flow. You may use the PV equation or factors from the PVIF table. Then add them together and subtract the initial investment to calculate the net present value (NPV) of the project. After completing the required calculations, explain your results in a Word document, and attach your cash flow chart showing your work. In your analysis of the project, be sure to address the following:
