Calculating OCF. Consider the following income statement:

Sales

Costs

Depreciation

EBIT $?$

Taxes $(34\%)?$

Net income?

$ $876,400$

$547,300$

$128,000$

Fill in the missing numbers and then calculate the OCF.

Phone Home, Inc., is considering a new three$-$year expansion project that requires an initial

fixed asset investment of $$4\mathrm{.}2$ million. The fixed asset will be depreciated straight$-$line to

zero over its three$-$year life, after which time it will be worthless. The project is estimated to

generate $$3,100,000$ in annual sales, with costs of $$990,000.$ If the tax rate is $35\%,$ what is

the OCF for this project?

In the previous problem $($question $7),$ suppose the project requires an initial investment in

net working capital of $$300,000,$ and the fixed asset will have a market value of $$210,000$ at

the end of the project. What is the project's year $0$ net cash flow? Year $1?$ Year $2?$ Year $3?$

What is the new NPV$?$

The Majestic Mulch And Compost Company $($MMCC$)$ is investigating the feasibility of a

new line of power mulching tools aimed at the growing number of home composters. Based

on exploratory conversations with buyers for large garden shops, MMCC projects unit sales

as follows:

The new power mulcher will sell for $$120$ per unit to start. When the competition catches

up after three years, however, MMCC anticipates that the price will drop to $$110.$The

power mulcher project will require $$20,000$ in net working capital at the start. The variable

cost per unit is $$60,$ and total fixed costs are $$25,000$ per year. It will cost about $$800,000$

to buy the equipment necessary to begin production. This investment is primarily in

industrial equipment, which qualifies as seven$-$year MACRS property. The equipment will

actually be worth about $20$ percent of its cost in eight years. The relevant tax rate is $34$

percent, and the required return is $15$ percent. Based on this information, should MMCC

proceed?