5 8 9 10 11 12 13 14 15 16 17 18 19 P12-2M (Use the modified problem below and assume the annual calculated cash flows are equal all 10 years of the project) Landcruisers Plus (LP) has operated an online retail store selling off-road trucks. As the name implies, the firm specializes in parts for the venerable Toyota FJ40 that is know throughout the world for its durability and off-road prowess. The fact that Toyota stopped building and exporting the F140 to the US market in 1982 meant that F140 owners depended more and more on re-manufactured parts to keep their beloved off-road vehicles running. More and more F140 owners are replacing the original inline six cylinder engines with a modern American-built engine. The engine replacement requires mating the new engine with the Toyota drive train. LP's owners had been offering engine adaptor kits for some time but have recently decided to begin building their own units. To make the adaptor kits the firm would need to invest in a variety of machine tools costing a total of $700,000. LP's management estimates that they will be able to borrow $400,000 from the firm's bank and pay 8% interest which equates to $32,000 per year in interest expense. The remaining funds would have to be supplied by LP's owners. The firm estimates that they will be able to sell 1,000 units a year for $1,500 each unit. The units would cost $1,100 each in cash expenses to produce (this does not include depreciation expense of $70,000 per year). There will also be operating cash expenses of $75,000 per year. The firm pays taxes equal to 30% A. (Part 1) What is the annual free cash flow LP should expect to receive from the investment in Year 1 assuming that it does not require any other investments in either capital equipment or working capital and the equipment is depreciated over a 10 year life to a zero salvage and book value? (Part 2) How Should the financing cost associated with the $400,000 loan be incorporated into the analysis of cash flow? B. If the firm's required rate of return for its investments is 10% and the investment has a 10-year expected life, what is the anticipated NPV of the investment? 20 21 22 23 24 25 26 27 28 Inputs 29 Cost of Machine 30 Unit Sales ($700,000) 1000 31 Sale Price per unit $1,500 32 Unit Cost per unit ($1,100) 33 Cash Expenses ($75,000) 34 Depreciation 35 Interest Expense ($70,000) ($32.000) (see page 377 for how to handle interest expense) 30% 10 36 Tax Rate 37 Years 38 Rate of Return 10% 39