Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

AAA Corp. currently has one product, high-priced lawn mowers. AAA Corp. has decided to sell a new line of medium-priced lawn mowers. The building and

image text in transcribed

AAA Corp. currently has one product, high-priced lawn mowers. AAA Corp. has decided to sell a new line of medium-priced lawn mowers. The building and machinery for producing this new line is estimated to cost $10,000,000 and it will be depreciated down to zero over 20 years using straight-line depreciation. Also, an investment today on working capital in the amount of $2,000,000 is needed. The working capital will be recovered at the end of the project. Sales for the new line of lawn mowers are estimated at $27 million a year. Annual variable costs are 60% of sales. The project is expected to last 5 years. In addition to the production variable costs, the fixed costs each year will be $4,000,000. The company has spent $1,000,000 in a marketing study that determined the company will lose $10 million in sales a year of its existing high-priced lawn mowers. The production variable cost of these sales is $8 million a year. It is expected that at the end of the project, the building and machinery can be sold for $8,000,000. The tax rate is 30 percent and the cost of capital is 6%. a. What is the initial outlay (10) for this project? The Initial Outlay is $ . (Round your answer to the nearest dollar - no decimals - and commas are required to separate thousands and millions. Use negative sign for negative cash flows - do not use parenthesis). b. What is the operating cash flows (OCF) for each of the years for this project? The OCF for each year of the project are $ (Round your answer to the nearest dollar - no decimals - and commas are required to separate thousands and millions). c. What is the termination value (TV) cash flow (aka recovery cost or after-tax salvage value, or liquidation value of the assets) at the end of the project? The termination value at the end of the project is $ . (Round your answer to two the nearest dollar - no decimals - and commas are required to separate thousands and millions). d. What is the NPV of this project? The NPV of this project is $ . (Round your answer to the nearest dollar - no decimals - and commas are required to separate thousands and millions. Use negative sign for negative cash flows - do not use parenthesis)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Finance questions