Question
Consider an order delivery business that will be a 5-year project. The required net working capital is $6.6 million and it will be returned at
Consider an order delivery business that will be a 5-year project. The required net working capital is $6.6 million and it will be returned at the end of the life of the project. Required equipment (net capital spending) will cost $15 million and it will be depreciated straight-line to 0 over the 5-year life of the project. The business will have sales of $3 million in year 1, $6 million in year 2 and $10 million in years 3, 4, and 5. Costs are 30% of sales and the tax rate is 20%. (If there is a loss at the EBIT line, assign taxes of 0 for that year and do not carry tax losses forward.) The equipment has no salvage value.
a. Create an income statement for years 1, 2, and 3, 4, and 5 (3, 4 and 5 will have the same income statement).
b. Use the information from the income statement to calculate the operating cash flow using EBIT + depreciation taxes for each year.
c. Put all cash flows (net working capital, net capital spending, and operating cash flows) on a timeline.
d. Using total cash flows from part c, Calculate the payback period.
e. Calculate the IRR.
f. Calculate the NPV using a 13% discount rate.
Please show all work so I can learn
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