Question
CAPITAL BUDGETING CASH FLOW ESTIMATION PROPOSED PROJECT Machine cost $200,000 Shipping cost $10,000 Installation cost $30,000 Net investment in operating working capital (NOWC) is estimated
CAPITAL BUDGETING CASH FLOW ESTIMATION
PROPOSED PROJECT
Machine cost $200,000
Shipping cost $10,000
Installation cost $30,000
Net investment in operating working capital (NOWC) is estimated to be 10% of Year 1 annual sales, which is required at year 0; and is expected to be fully recovered at the end of the projects life.
Project (Economic life) 4 years
Salvage value $25,000
Depreciation method MACRS 3-year class with depreciation rates as follows:
Year 1=33%; Year 2=45%; Year 3= 15%; Year 4=7%
Estimated Annual Sales and Costs:
| Year 1 | Year 2 | Year 3 | Year 4 |
No. of units | 1,250 |
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Unit price | $200 |
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Unit cost | $100 |
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++ = Unit sales increase at 2% p.a. for Yr 2; 3% for yr 3; and 4% for yr 4
**Price increase annually at 4%p.a and cost increase annually at 3% p.a.
Tax rate = 40%
Projects cost of capital = 10%
Is the proposed project viable? Use NPV and IRR to make your decision.
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