Engineering Economics

Question#01:-

Excel Aluminum works Inc. an aluminum accessories manufacturer, is considering to expand its manufacturing facility to meet rising demand of aluminum doors. The plant manager has compiled following financial data for the project which will start operations from 1st January 2020:

• Molding and posturing equipment: $782,000
• Freight charges for equipment delivery: $10,000
• Site preparation and equipment installation charges: $8,000
• Equipment maintenance charges: $36,000 per year.
• Material charges: $2 per unit
• Labor charges: $3 per unit
• Manufacturing overhead: 10,000 per month
• Maintenance: 50,000 per year
• Finished goods inventory to maintain: 2-month supply
• Raw materials inventory to maintain: 2-month supply
• Accounts receivable: 60 days
• Accounts payable: 30 days

An end of year annual revenue of $2,400,000 is expected by selling 120,000 doors.

The building that will house the new production facility would cost $2,000,000 to construct on a piece of land that costs $400,000. The expected life of the project is six years. At the end of the project the equipment has an estimated salvage value of $80,000, the land can be sold for $400,000 and the building for $1,705,727. The equipment is classified as a four-year MACRS property (half year convention, 200%DB and zero salvage value). The building will be depreciated according to a 39-years class property. Only half of the working capital will be recovered at the end of the project due to inventory obsolescence. The firms taxable income from regular business excluding this project is $7,000,000. The firm evaluates all such investment projects at MARR of 15%. The gain tax of 40% is applicable for any gains (losses) recorded from disposal of assets in this case.

Assuming that 50% of the total initial capital investment will be financed through a local bank at an interest rate of 10% compounded annually, and is to be repaid in six equal annual instalments, determine the net after-tax cash flows for the project and develop projects cash flow statement using table given below

You need to compute the various elements of cash flow statement asked in sub-sections below and furnish the statement afterwards on the table provided. No marks will be awarded for the entries made without proper working performed.

1. 1. Calculate annual depreciation charge (in dollars) for the assets involved in the project. Show the complete calculation procedure, mere values will not earn you any reward. ?
2. 2. Calculate the working capital required to be invested in the project. ?
3. 3. Calculate the amount to be financed from the bank and its repayment schedule for cash flow statement. You need to tabulate the repayment schedule here. ?
4. 4. Calculate taxable income and find net income using income tax rate applicable for all six years. To save time, show the working for year-1 and year 6 only, remaining years calculations can be done on calculator and the cash flow statement updated accordingly. ?
5. 5. Calculate net proceeds from the sale of equipment, building and land incorporating appropriate gain (loss) tax effects at 40% rate. Calculate total gain tax resulting from sale of all three assets above and write in the net gain tax field of cash flow statement?