FIN $20150$

Graded Problem Set #$2$

Summer $2024$

$[$Ch $10]$ Use the following information to answer questions $17$ to $20.$ Note: while Excel would be handy to solve these problems, the intent is to solve these by hand $($i$.$e$.,$ with a calculator$)$ as you will need to do on the exam.

Tastee$-$Pro Inc. is considering a proposal to manufacture high$-$end protein bars.

The project requires use of an existing warehouse that the firm acquired $6$ years ago for $$400,000$ and currently rents, generating $$40,000$ of after$-$tax income $($profit$)$ per year. Rental income is expected to remain constant for the next $10$ years. Assume the warehouse was previously allocated $100\%$ bonus depreciation and has no remaining book value.

In addition to using the warehouse, the project requires an upfront investment into machinery of $$5,000,000.$ This investment can be fully depreciated under the straight$-$line method over the next $10$ years for tax purposes. However, Tastee$-$Pro expects to terminate the project at the end of $7$ years and to sell the machinery for $$1,000,000.$

The project requires a net working capital investment equal to $10\%$ of projected sales $($i$.$e$.,$ net working capital requirement in year $t$ is $10\%$ of sales in year $t+1).$ The net working capital investment begins immediately $)$ and will be fully recovered at the end of the project $).$

Sales of Tastee$-$Pro bars are expected to be $$6,000,000$ in the first year and are projected to stay constant throughout the $7$ years life of the project.

Costs of goods sold and operating expenses $($excluding depreciation$)$ are $70\%$ of sales.

Profits are taxed at $20\%.$

The discount rate for projects of this sort is $13\mathrm{.}0\%$ per year.

In Canvas:

report dollar values to nearest $$1($do not round any intermediate calculations$)$

report a cash inflow $($something that increases free cash flow$)$ as a positive value

report a cash outflow $($something that decreases free cash flow$)$ as a negative value

What is the project's Free Cash Flow at time $0?$

$t=0$

$($to nearest $$1)$

$18.$ What is the project's Free Cash Flows each year for years $1-6?$

$DCF=$$$0\frac{?}{{?}_{\frac{?}{?}}}$

$NW{C}_0=$$

CapEx $=-$$$400,000$

$($to nearest $$1)$

$19.$ What is the project's Free Cash Flow for year $7?$

$($to nearest $$1)$

$20.$ What is the project's NPV$?$

$($to nearest $$1)$