(25) 3. A three-year project requires an initial investment (i.e., at t=0) in equipment of $600,000. At t=3, the company plans to sell the equipment for $50,000. The equipment can be depreciated according to the five year MACRS depreciation schedule, which allows depreciation of 20.00% at t=1, 32.00% at t=2, 19.20% at t=3, 11.52% at t=4, 11.52% at t=5, and 5.76% at t=6. Depreciation will be based solely on the initial cost of the equipment (i.e., when calculating depreciation, ignore any salvage value). A building renovation necessary for the project was completed last year, at a cost of $300,000. The cost of this renovation can be depreciated straight-line over three years (i.e., the renovation depreciation charge will be $100,000 at t=1, $100,000 at t=2, and $100,000 at t=3). The project is expected to produce sales revenue of $800,000 the first year (i.e., at t=1); this revenue will increase by 20% per year over the next two years (i.e., at t-2 and t=3). Manufacturing costs are estimated to be 60% of sales. The Research and Development (R&D) for the project was completed last year; the cost of the R&D was $80,000. The project requires an investment in working capital. Specifically, at each point in time, working capital must be maintained at 10% of next year's forecasted sales revenue; so, for example, the amount of working capital required at t=0 is 10% of tl revenue, or $80,000. Working capital will be fully recovered at t=3. The corporate tax rate is 25%. The company's tax situation is such that it can make use of all applicable tax shields and deductions. In preparation for a capital budgeting analysis, calculate the cash flows for this project at t=0, tri, t=2, t=3, and t=4. (25) 3. A three-year project requires an initial investment (i.e., at t=0) in equipment of $600,000. At t=3, the company plans to sell the equipment for $50,000. The equipment can be depreciated according to the five year MACRS depreciation schedule, which allows depreciation of 20.00% at t=1, 32.00% at t=2, 19.20% at t=3, 11.52% at t=4, 11.52% at t=5, and 5.76% at t=6. Depreciation will be based solely on the initial cost of the equipment (i.e., when calculating depreciation, ignore any salvage value). A building renovation necessary for the project was completed last year, at a cost of $300,000. The cost of this renovation can be depreciated straight-line over three years (i.e., the renovation depreciation charge will be $100,000 at t=1, $100,000 at t=2, and $100,000 at t=3). The project is expected to produce sales revenue of $800,000 the first year (i.e., at t=1); this revenue will increase by 20% per year over the next two years (i.e., at t-2 and t=3). Manufacturing costs are estimated to be 60% of sales. The Research and Development (R&D) for the project was completed last year; the cost of the R&D was $80,000. The project requires an investment in working capital. Specifically, at each point in time, working capital must be maintained at 10% of next year's forecasted sales revenue; so, for example, the amount of working capital required at t=0 is 10% of tl revenue, or $80,000. Working capital will be fully recovered at t=3. The corporate tax rate is 25%. The company's tax situation is such that it can make use of all applicable tax shields and deductions. In preparation for a capital budgeting analysis, calculate the cash flows for this project at t=0, tri, t=2, t=3, and t=4
