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John Smith is an analyst who follows the electronics industry. One of the companies he follows, ABC Electronics, has recently announced plans to begin producing
John Smith is an analyst who follows the electronics industry. One of the companies he follows, ABC Electronics, has recently announced plans to begin producing and selling a new series of tablet computers. Smith has received financial projections from senior management for the three-year project. ABC will need to purchase new machinery that is estimated to cost $3.3 million that will be depreciated using straight-line over the project's 3-year life to a salvage value of $0. In addition, ABC estimates that the project will require a one-time injection of working capital of $150,000 at the start of the project to handle the new line of business that will be recovered at project end. ABC expects to sell 6,000 units each year at a per unit price of $500 for the life of the project. Fixed costs are estimated at $175,000 per year, and variable costs are estimated at $200 per unit. While the asset is fully depreciated over the project's life, ABC internally estimates that machinery will be sold for $350,000 at project end (before applicable taxes). The tax rate is 40%. Smith estimates the appropriate project discount rate to be 14% The project's forecasted cash flow from operations in year 1 is closest to: $1,600,000 $1,520,000. $1,415,000. $1,670,000
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