IBM is considering a new expansion project and the finance staff has received information summarized below.

• The project require IBM to purchase $900,000 of equipment in 2013 (t=0).
• Inventory will increase by $175,000 and accounts payable will rise by $75,000.
• The project will last for four years. The company forecasts that they will sell 2,685,000 units in 2014, 2,600,000 units in 2015, 2,525,000 units in 2016, and 2,450,000 units in 2017. Each unit will sell for $2.
• The fixed cost of producing the product is $2 million each year.
• The variable cost of producing each unit will rise from $1.018, 1.078, 1.046 and $1.221 from 2013 to 2017 respectively.
• The equipment will be depreciated under the MACRS system using the applicable rates of 33%, 45%, 15%, and 7% respectively
• When the project is completed in 2017 (t=4), the company expects that it will be able to salvage the equipment for $100,000, and it expects that it will fully recover the NWC.
• The estimated tax rate is 40%.
• Based on the perceived risk, the projects WACC is estimated to be 10%.

Your main task is to and evaluate the cash flows, analyze the results, and present your recommendations. To help in the analysis, answer all the following questions:

1. What is the total equipment cost at the start?

• Total equipment cost = Cost of equipment + Installation

2. What is the depreciation amount for each year?

• Create a depreciation schedule as flows:

Year 1 Year 2 Year 3 Year 4

33% 45% 15% 7% => 100%

x x x x

Total Equipment cost Total Equipment cost Total Equipment cost Total Equipment cost

3. Calculate the Net Income for each year

4. Calculate the Operating Cash Flow for each year