Question
Forbes Corporation is a manufacturing company that produces a variety of products. It has a 12% cost of capital. Forbes is considering a capital project
Forbes Corporation is a manufacturing company that produces a variety of products. It has a 12% cost of capital. Forbes is considering a capital project that involves the acquisition of new equipment that costs $200,000, has an 8 year life, and a salvage value of $40,000 before taxes, which is recovered at the end of the project. If the project goes ahead, annual sales are estimated at $150,000, with variable costs of $75,000, and fixed costs of $25,000. The tax rate is 10%. Initial net working capital required is $15,000 with an increase of $5,000 in year 3 of the project. All of the working capital is recovered at the end of the project. The equipment will require a major maintenance in year 6 costing $50,000 before taxes, and $45,000 after taxes. a. Compute EBIT and the net annual operating cash flow for each of the projects 8 years. b. Using Excel compute NPV of the project. Make sure you include all relevant cash flows; net annual operating cash flows, over the life of the project, after taxes; outflow of net working capital at the beginning of the project, and also in year 3, as well as the recovery of net working capital inflow at the end of the project; major maintenance related after tax cash outflows in year 6; the cash outflow related to the initial acquisition of the equipment; and, the cash inflow related to the salvage value received in year 8. c. Should the firm accept the project? Explain. d. If the firm's cost of capital is 15% would your answer be the same? Why? Explain.
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