A Multi-Part Question:

The engineers at Cyberdyne Corporation have developed a new robotic manufacturing machine, the Model T1000.The marketing department's forecast for sales of the new machine are shown below.The equipment needed to manufacture the machine is expected to have a useful life of 9 years.The equipment will be installed on January 1, 2020 and the project will commence operations in 2020.

Revenue Forecast for the Model T1000

($ In Thousands)

Year:

2020

2021

2022

2023

2024

2025

2026

2027

2028

Revenue:

$1900

$2100

$2500

$2700

$2900

$3000

$2800

$2500

$2100

The following information has also been provided:

1.Management estimates the equipment and other assets needed to manufacture and distribute the T1000 will cost $2,500,000.The assets have an MACRS class life of 7 years and will have a salvage value of $300,000 at the end of the project.The equipment would be installed at the end of 2018 and production would begin in 2019.Assume the MACRS system is used to determine depreciation.

MACRS Depreciation Rates for 7 Year Class Life

Year:

1

2

3

4

5

6

7

8

Revenue:

14%

25%

17%

13%

9%

9%

9%

4%

2.Based on the forecast volume of production, management forecasts the raw materials cost schedule shown below.

Forecast of Cost of Raw Materials and Parts

($ In Thousands)

Year:

2020

2021

2022

2023

2024

2025

2026

2027

2028

Materials Cost:

$900

$1000

$1100

$1300

$1350

$1400

$1350

$1250

$1200

3.Miscellaneous expenses and other costs are shown below:

Forecast of Miscellaneous Expenses and Other Costs

($ In Thousands)

Year:

2020

2021

2022

2023

2024

2025

2026

2027

2028

Other Costs:

$300

$350

$400

$425

$500

$550

$600

$650

$700

4.Cyberdyne's income tax rate is 35%.

5.The company generally requires net working capital to be 25% of sales.

6.Because Cyberdyne has signed long-term agreements for raw materials, the investment is considered to be less risky than the average investment.One way of taking risk into account is to have a higher or lower discount rate, or required rate of return.Consequently, Cyberdyne requires a minimum rate of return of 6.75% on this project.

Questions:

28.The Initial Investment of the Project, or the Cash Outflow at time zero at the end of 2019, is:

a.$1075

b.$1575.

c.$2025

d.$2500.

e.$2975.

29.The project's free cash flows for the first three years, or years 2020, 2021, and 2022, are:

202020212022

a.$350$125$575

b.$228$81$374

c.$528$606$749

d.$578$706$799

e.$805$1,113$1,075

30.The project's free cash flows for the second three years, or years 2023, 2024, and 2025, are:

202320242025

a.$423$536$536

b.$748$761$761

c.$650$825$825

d.$698$736$811

e.$959$908$908

31.The project's free cash flows for the final three years, or years 2026, 2027, and 2028, are:

202620272028

a.$406$325$130

b.$631$425$130

c.$778$490$130

d.$625$500$500

e.$706$525$850

32.The projects cash flow from salvage is:

a.$300

b.$295

c.$195

d.$105

e.$720

33.The project's Net Present Value is:

a.$4,489

b.$2,188

c.$1,514

d.($678)

e.($787)

34.After completing the analysis, you are informed by suppliers of the special metals and electrical components needed for production of the new machine will qualify Cyberdyne for quantity discounts.The forecast is that the discounts will reduce the cost of raw materials and supplies used in all of Cyberdyne's products by $300,000 annually during the life of the project.The cost reduction is an example of:

a.an opportunity cost.

b.a sunk cost.

c.a negative externality.

d.a synergy or positive externality.

e.a real option.

35.Taking the $300,000 annual quantity discounts into account, the project's free cash flows for the first three years, or years 2020, 2021, and 2022, are:

202020212022

a.$650$425$875

b.$528$381$674

c.$723$801$944

d.$773$901$994

e.$1,000$1,308$1,270

36.The project's free cash flows for the second three years, or years 2023, 2024, and 2025, are:

202320242025

a.$723$836$836

b.$1,048$1,061$1,061

c.$845$1,020$1,020

d.$893$931$1,006

e.$1,154$1,103$1,103

37.The project's free cash flows for the final three years, or years 2026, 2027, and 2028, are:

202620272028

a.$601$520$325

b.$826$620$325

c.$973$685$325

d.$820$695$695

e.$901$720$1,045

38.The project's Net Present Value would now be:

a.$5,773

b.$4,164

c.$2,798

d.$1,189

e.$606