1. Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $7.8 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent facilities elsewhere. The land would net $10.6 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $21.8 million to build, and the site requires $930,000 worth of grading before it is suitable for construction. Required: What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? Requirement 1: Fill in the missing numbers in the following income statement: $ Sales Costs Depreciation EBIT Taxes (40%) 644,000 345,500 96,200 $ Net income $ Requirement 2: What is the OCF? OCF $ Requirement 3: What is the depreciation tax shield? Depreciation tax shield $ 2. Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,250,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,200,000 in annual sales, with costs of $1,190,000. The project requires an initial investment in net working capital of $155,000, and the fixed asset will have a market value of $180,000 at the end of the project. Assume that the tax rate is 40 percent and the required return on the project is 10 percent. Requirement 1: What are the net cash flows of the project for the following years? Cash Flow $ Year 0 1 2 3 Requirement 2: What is the NPV of the project? NPV 3. Consider a three-year project with the following information: initial fixed asset investment = $698,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $34.15; variable costs = $22.60; fixed costs = $210,500; quantity sold = 96,500 units; tax rate = 40 percent. Required: What is the OCF at the base-case quantity sold? OCF What is the OCF at 97,500 units sold? OCF $ How sensitive is OCF to changes in quantity sold? AOCF/AQ 4. You are considering a new product launch. The project will cost $1,022,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 400 units per year; price per unit will be $20,200, variable cost per unit will be $16,700, and fixed costs will be $338,000 per year. The required return on the project is 14 percent, and the relevant tax rate is 35 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within +10 percent. Required: (a) What are the best and worst case values for each of the projections? Unit sales 400 Variable costs $16,700 Scenario Base Best Worst Fixed costs $338,000 (b) What are the best- and worst-case OCFs and NPVs with these projections? Best-case Worst-case OCF $ $ NPV $ $ (c) What is the base-case OCF and NPV? OCF base NPV base $ S. (d) What is the OCF and NPV with fixed costs of $348,000 per year? OCF NPV $ $ (e) What is the sensitivity of the NPV to changes in fixed costs? For every dollar FC increase, NPV falls by $
