Information: General Electric is considering expanding into the soda business with a new product. Assume that you were recently hired as an assistant to the director of capital budgeting, and you must evaluate the new project.

The soda would be produced in an unused building adjacent to GEs Arlington plant; GE owns the building, which is fully depreciated. The required equipment would cost $200,000, plus an additional $40,000 for shipping and installation. In addition, inventories would rise by $25,000, while accounts payable would increase by $5,000. All of these costs would be incurred at t = 0. The machinery will be depreciated under the MACRS system. The applicable depreciation rates are 33%, 45%, 15%, and 7%.

The project is expected to operate for 4 years, at which time it will be terminated. The cash inflows are assumed to begin one year after the project is undertaken. At the end of the projects life, the equipment is expected to have a salvage value of $25,000.

Unit sales are expected to total 100,000 units per year, and the expected sales price is $2 per unit. The cost of goods sold (which by definition excludes depreciation) is expected to total 60% of dollar sales. GEs tax rate is 40%, and its WACC is 10%. This is an average-risk project for GE.

You have been asked to evaluate the project and make a recommendation as to whether it should be accepted or rejected. Your boss would like you to use all of the capital budgeting techniques to evaluate this project. To guide you in your analysis, your boss wants you to do the following:

1. Compute the Net Income (also called (EBIT-T)) generated from the project. Lists all accounts in the Income Statement.
2. What is the Operating Cash Flow (OCF) formula?
3. Compute the Operating Cash Flows (OCF) generated by the project.
4. Summarize the computed values on a Total Project Cash Flow chart.