Cash Flow, Risk, and Working Capital

Placeholders are used in the project description and the numbers are in the accompanying tables.

M&M Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Tashay Wilcox, a recently graduated MBA. The production line would be set up in unused space in M&M$\text{'}$s main plant. The machinery's invoice price would be approximately $$,$ another $$12,000$ in shipping charges would be required, and it would cost an additional $$28,000$ to install the equipment. The machinery has an economic life of $4$ years, and M&M has obtained a special tax ruling that places the equipment in the MACRS $3$year class. The machinery is expected to have a salvage value of $$26,000$ after $4$ years of use.

The new line would generate incremental sales of $1,250$ units per year for $4$ years at an incremental cost of $ per unit in the first year, excluding depreciation. Each unit can be sold for $ in the first year. The sales price and cost are both expected to increase by $3\%$ per year due to inflation. Further, to handle the new line, the firm's net working capital would have to increase by an amount equal to $12\%$ of sales revenues. The firm's tax rate is $35\%,$ and its overall weighted average cost of capital is $10\%.$Cost perunit$102103104105106107108109$Salesprice per$202203204205206207208209$unit

a$.$ What is the firm's depreciable basis? What are the annual depreciation expenses?

b$.$ Calculate the annual sales revenues and costs $($other than depreciation$).$

c$.$ Construct annual incremental operating cashflow statements.

d$.$ Estimate the required net working capital for each year and the cash flow due to investments in net working capital.