0 Required 1. Separate the cash flows into four groups: (1) net initial investment cash flows, (2) cash flows from operations, (3) cash flows from terminal disposal of investment, and (4) cash flows not relevant to the capital budgeting problem. 2. Calculate the net present value (NPV) of the expansion project and comment on your analysis. Print Done t apply.) Metropolitan Manufacturing manufactures over 20,000 different products made from metal, including building materials, tools, and furniture parts. The manager of the Furniture Parts division has proposed that his division expand into bicycle parts as well. The Furniture Parts division currently generates cash revenues of $4,850,000 and incurs cash costs of $3,700,000, with an investment in assets of $12,070,000. One-quarter of the cash costs are direct labour. i (Click the icon to view the additional information.) (Click the icon to view the present value of $1 factors.) (Click the icon to view the present value annuity of $1 factors.) Required Click the icon to see the Worked Solution. Requirement 1. Separate the cash flows into four groups: (1) net initial investment cash flows, (2) cash flows from operations, (3) cash flows from terminal disposal of investment, and (4) cash flows not relevant to the capital budgeting problem. First, identify and calculate the net initial investment cash flows. (Use parentheses or a minus sign for cash outflows.) Net initial investment Initial equipment investment $ (4.800,000) Initial working-capital investment (44,000) $ (4.844,000) Net initial investment Now, identify and calculate the cash flows from operations. (Use parentheses or a minus sign for cash outflows.) $ Cash flows from operations Cash revenues Material cash costs Direct labour cash costs 4,050,000 (1,540,000) (925,000) (430,000) Increase in cash overhead costs 1,155,000 Annual cash flows from operations with new equipment Deduct: Income-tax payments (346,500) Annual after-tax cash flows from operations $ 808,500 129.000 Add: Income-tax cash savings from annual depreciation $ 937,500 Total cash flows from operations (after-tax) Now, identify and calculate the cash flows from the terminal disposal of investment Metropolitan Manufacturing manufactures over 20,000 different products made from metal, including building materials, tools, and furniture parts. The manager of the Furniture Parts division has proposed that his division expand into bicycle parts as well. The Furniture Parts division currently generates cash revenues of $4,850,000 and incurs cash costs of $3,700,000, with an investment in assets of $12,070,000. One-quarter of the cash costs are direct labour. (Click the icon to view the additional information.) (Click the icon to view the present value annuity of $1 factors.) (Click the icon to view the present value of $1 factors.) Required H. Now, identify and calculate the cash flows from the terminal disposal of investment. Additional information Terminal disposal of investment Terminal disposal of equipment Terminal disposal of working capital $ 500.000 44,000 $ Cash flow from terminal disposal of investment 544.000 Now, identify the cash flows that are not relevant to the capital budgeting of this situation. (Select all that apply.) A. Increase in cash overhead costs B. Direct labour costs of the furniture parts division LYC. The revenues in the furniture parts division D. CFO salary CE. The investment in the furniture parts division LE. Costs of the furniture parts division except for direct labour The manager estimates that the expansion of the business will require an investment in working capital of $44.000. Because the company already has a facility, there would be no additional rent or purchase costs for a building, but the project would generate an additional $430,000 in annual cash overhead. Moreover, the manager expects annual materials cash costs for bicycle parts to be $1,540,000, and labour for the bicycle parts to be about the same as the labour cash costs for furniture parts. The Controller of Metropolitan, working with various managers, estimates that the expansion would require the purchase of equipment with a $4,800,000 cost and an expected disposal value of $500,000 at the end of its 10-year useful life. Depreciation would occur on a straight-line basis. The CFO of Metropolitan determines the firm's cost of capital as 14%. The CFO's salary is $480,000 per year. Adding another division will not change that. The CEO asks for a report on expected revenue for the project and is told by the marketing department that it might be able to achieve cash revenue of $4,050,000 annually from bicycle parts. Metropolitan Manufacturing has a tax rate of 30%. The CCA rate is 20% Requirement 2. Calculate the net present value (NPV) of the expansion project and comment on your analysis. First, calculate the NPV of the expansion project. (Use factors rounded to three decimal places, X.XXX. Round your final answer to the nearest whole dollar. Use parentheses or a minus sign for a negative NPV.) NPV = $ 192,880 Print Done Now, comment on the analysis. Since the net present value is positive, this is a good investment for a company that requires a(n) 14% rate of return. Metropolitan should expand into bicycle parts Now, calculate the net present value, accounting for the tax shield. (Use factors rounded to three decimal places, X.XXX. Round your final answer to the nearest whole dollar. Use parentheses or a minus sign for a negative NPV.) Operational NPV (without accounting for a tax shield) Present value of Purchase accounting for Salvage NPV with tax shield