Page 158 2. Cash flows Reliable Electric, a major Ruritanian producer of electrical products, is considering a proposal to manufacture a new type of industrial electric motor that would replace most of its existing product line. A research breakthrough has given Reliable a two-year lead on its competitors. The project proposal is summarized in Table 6.4. a. Read the notes to the table carefully. Which entries make sense? Which do not? Why or why not? b. What additional information would you need to construct a version of Table 6.4 that makes sense? Construct such a table and recalculate NPV. Make additional assumptions as necessary. Table 6.4 Cash flows and present value of Reliable Electric's proposed investment ($ thousands). See Problem 2. 2015 2019 2020 2021-2025 L Capital expenditure -10,400 2. Research and development -2,000 3. Working capital 4,000 4. Revenue 6,000 16,000 40,000 5. Operating costs -4,000 -8,000 -20,000 6. Overhead -800 -1,600 -4,000 Depreciation -1,040 -1,040 -1,040 8. Interest -2,160 -2,160 -2,160 9. Income -2,000 0 3,200 12,500 10. Tax 30% 0 360 3,840 11. Net cash flow -16,400 0 2,840 5,960 12. Net present value- +16,149 Notes 1. Capital expenditure: $8 million for new machinery and $2.4 million for a warehouse extension. The full cost of the extension has been charged 2. Research and development $1.82 million spent in 2017. This figure was corrected for 10% inflation from the time of expenditure to date. Thus I 3. Working capital Initial investment in inventories 4. Revenue These gures assume sales of 2,000 motors in 2019, 4,000 in 2020, and 10,000 per year from 2021 through 2028. The initial unit pric 5. Operating costs. These include all direct and indirect costs. Indirect costs (heat, light, power, fringe benefits, etc.) are assumed to be 200% of di 6. Overhead Marketing and administrative costs, assumed equal to 10% of revenue. 7. Depreciation: Straight-line for 10 years. 8. Interest Charged on capital expenditure and working capital at Reliable's current borrowing rate of 15%. 9. Income: Revenue less the sum of research and development, operating costs, overhead, depreciation, and interest 10. Tax: 30% of income. However, income is negative in 2018. This loss is carried forward and deducted from taxable income in 2020. 11. Net cash flow. Assumed equal to income less tax. 12. Net present value: NPV of net cash flow at a 15% discount rate.