7. The estimation of a project's net investment and net annual cash flows

Consider the case of Collins Construction Co.:

Collins Construction Co. currently earns annual revenues of $350,000 and incurs total operating expenses (excluding depreciation and interest expense) of 45.00% of revenues. Its earnings are taxed at a rate of 40%.

Today, its budgeting committee is evaluating the purchase of a new forklift. The forklift is expected to cost $60,000, plus $4,000 in freight and setup expenses, and will be depreciated using straight-line depreciation. It is expected that the forklift will have a useful life of ten years and a salvage value equal to 25.00% of its purchase price of $60,000. It is expected that the forklift will be sold for its book value, such that no capital gain or loss will be realized.

It is further expected that the forklift will cause a 30.00% increase in the firms annual sales and total operating expenses (excluding depreciation and interest expense). If the forklift is purchased, the firm will require an additional $10,000 in net working capital (NWC).

Given this information, complete the following analysis:

Question	Answer
What is the annual depreciation expense for the forklift?	$4,900
What is the net investment (NINV) of the investment?	$74,000
What are the net annual operating after-tax cash flows associated with this project?
What is the projects last year (terminal) cash flow?