Answered step by step
Verified Expert Solution
Question
1 Approved Answer
BrickTon Cement Inc. is considering launching a new product. Using the information provided below, calculate the after-tax cash flows resulting from the new project for
BrickTon Cement Inc. is considering launching a new product. Using the information provided below, calculate the after-tax cash flows resulting from the new project for each year (0-8), and determine whether the new project should be accepted or rejected, and explain why. A new machine will need to be purchased for $825,000. The project is expected to last 8 years, and the machine to be sold for $150,000 at the end of the 8 years of the project. The machine will be depreciated using a 10-year recovery period; you will need to use the depreciation percentages given in Table 7-3 in the textbook (the 10-year column) to compute annual depreciation for each of the 8 years of the project. Assume that in addition to the cost of the machine, the initial outlay will include a negative cash flow resulting from the increase in net working capital of $15,000 required to start the project. In each of the subsequent years the change in net working capital will be equal to 10% of the change in revenue in the following year (note that an increase in net working capital represents a negative cash flow, while a decrease in net working capital represents a positive cash flow). At the end of year 8, net working capital will return to the level that existed before the project was started. Assume the project will result in additional 300 loads of cement sold each year during the first 4 years of the project (1-4), and 400 loads of cement sold each year during the second 4 years of the project (5-8). Each load of cement will sell for a price of $2,500 in year 1. The price is assumed to rise by 5% in each year that follows. Each load of cement costs $1,500 to produce during the entire 8 years (treat the revenues and costs as cash flows). Further assume 14% cost of capital, and 23% tax rate. BrickTon Cement Inc. is considering launching a new product. Using the information provided below, calculate the after-tax cash flows resulting from the new project for each year (0-8), and determine whether the new project should be accepted or rejected, and explain why. A new machine will need to be purchased for $825,000. The project is expected to last 8 years, and the machine to be sold for $150,000 at the end of the 8 years of the project. The machine will be depreciated using a 10-year recovery period; you will need to use the depreciation percentages given in Table 7-3 in the textbook (the 10-year column) to compute annual depreciation for each of the 8 years of the project. Assume that in addition to the cost of the machine, the initial outlay will include a negative cash flow resulting from the increase in net working capital of $15,000 required to start the project. In each of the subsequent years the change in net working capital will be equal to 10% of the change in revenue in the following year (note that an increase in net working capital represents a negative cash flow, while a decrease in net working capital represents a positive cash flow). At the end of year 8, net working capital will return to the level that existed before the project was started. Assume the project will result in additional 300 loads of cement sold each year during the first 4 years of the project (1-4), and 400 loads of cement sold each year during the second 4 years of the project (5-8). Each load of cement will sell for a price of $2,500 in year 1. The price is assumed to rise by 5% in each year that follows. Each load of cement costs $1,500 to produce during the entire 8 years (treat the revenues and costs as cash flows). Further assume 14% cost of capital, and 23% tax rate
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