ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $848,000.00 work cell. Further, it will cost the firm $57,000.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $60,900.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $5,800.00. Finally, the firm will invest $11,400.00 in net working capital to ensure the project has sufficient resources to be successful.
The project will generate annual sales of $918,000.00 with expenses estimated at 36.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 38.00%.
The work cell is estimated to have a market value of $454,000.00 at the end of the fourth year. The firm expects to reclaim 84.00% of the final NWC position.
The cost of capital is 11.00%.
What is the cash flow to start the project in year 0?
Here is the solution with different numbers but I was unable to figure it out:
Solution ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $750,000 work cell. Further, it will cost the firm $50,000 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $60,000. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $5,000. Finally, the firm will invest $10,000 in net working capital to ensure the project has sufficient resources to be successful. The tax rate facing the firm is 40%. The project will generate annual sales of $900,000 with expenses estimated at 40% of sales. Net working capital will be held constant at $10,000 throughout the project. The tax rate is 40%. The work cell is estimated to have a market value of $500,000 at the end of the fourth year. Further, the firm expects to reclaim 80% of the final NWC position for the project. The cost of capital is 12% What is the cash flow to start the project in year 0? FC Fo= (Sales - Expenses - Depreciation)x (1 -T) + Depreciation - ANWC - AGross PPE - PV of opportunity costs + NSV of replaced assets Before we solve, we need to calculate the opportunity cost of the borrowed equipment. The equipment COULD be sold for $5,000 which is a market value. The opportunity cost is the market value net of any taxes, which requires us to calculate a net salvage value (NSV). The equipment is fully depreciated which means the book value is equal to zero. Opportunity cost = NSV of borrowed equipment - MV - Tx(MV - BV) NSV = $5,000 - 40x ($5,000 - $0) = $3,000 FCF, = ($0-$60,000 - $0)x(1 -.40) + 0 - $10,000 - $750,000 - $50,000-$3000+ $0 = -$849,000 Note: We consider the $50,000 in installation cost as a capital expenditure. The depreciable basis equals the cost of the asset plus any installation and delivery cost. Solution ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $750,000 work cell. Further, it will cost the firm $50,000 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $60,000. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $5,000. Finally, the firm will invest $10,000 in net working capital to ensure the project has sufficient resources to be successful. The tax rate facing the firm is 40%. The project will generate annual sales of $900,000 with expenses estimated at 40% of sales. Net working capital will be held constant at $10,000 throughout the project. The tax rate is 40%. The work cell is estimated to have a market value of $500,000 at the end of the fourth year. Further, the firm expects to reclaim 80% of the final NWC position for the project. The cost of capital is 12% What is the cash flow to start the project in year 0? FC Fo= (Sales - Expenses - Depreciation)x (1 -T) + Depreciation - ANWC - AGross PPE - PV of opportunity costs + NSV of replaced assets Before we solve, we need to calculate the opportunity cost of the borrowed equipment. The equipment COULD be sold for $5,000 which is a market value. The opportunity cost is the market value net of any taxes, which requires us to calculate a net salvage value (NSV). The equipment is fully depreciated which means the book value is equal to zero. Opportunity cost = NSV of borrowed equipment - MV - Tx(MV - BV) NSV = $5,000 - 40x ($5,000 - $0) = $3,000 FCF, = ($0-$60,000 - $0)x(1 -.40) + 0 - $10,000 - $750,000 - $50,000-$3000+ $0 = -$849,000 Note: We consider the $50,000 in installation cost as a capital expenditure. The depreciable basis equals the cost of the asset plus any installation and delivery cost
