Question
ABC Inc is considering investing in a new hydraulic press. The press will cost $130000, has a useful life of 7 years, $30000 salvage value,
ABC Inc is considering investing in a new hydraulic press. The press will cost $130000, has a useful life of 7 years, $30000 salvage value, and will be depreciated using the straight-line method. This project has a life of 3 years. At the end of the 3rd year, the press will be sold at an estimated value of $60000. ABCs WACC is equal to 10% and the tax rate is equal to 35%. Net working capital requirements for this project are $15000, represent a necessary increase in spare parts inventory, and will be constant throughout the projects life. This inventory of spare parts will be depleted by the end of year 3. If purchased, the hydraulic press will help increase cash revenue by $20000 annually while increasing operating expenses by $2000 at the same time.
Required:
1) Compute operating cash flow for years 1, 2 and 3.
2) Compute cash flow due to the change in fixed assets for years 0 and 3.
3) Compute cash flow due to the change in NWC in years 0 and 3.
4) Compute free cash flow for years 0, 1, 2, and 3.
5) Compute the simple payback period for this project.
6) Compute Net Present Value for this project.
7) Should the project be accepted?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started