Need help calculating on paper, not excel
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). Account Receivables 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 project's interest rate 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? 2. What is the Net Working Capital? Hint: Net Working Capital = Increase in Current Assets Increase in Current Liabilities 3. What is the total investment amount at the start of the project (i.e. year zero cash flow)? Hint: Initial investment in Year 0 is the total equipment cost + Net Working Capital 4.What is the depreciation amount for each year? 5. Calculate the book values for each year Year 1 2 3 4 6. What is the after-tax salvage value (market value of the equipment at the end of the project) After-tax salvage value = Salvage value Tax ( Salvage Value - Book Value) 7. Compute the Net Income during the project's life for each year. Note: You must list all the accounts and entries in order to earn full credit. No credit will be awarded for merely listing numbers without the associated accounts. Show the work in order to full credit List accounts in this column. Year 1 2 3 4 8. Calculate the Operating Cash Flows (OCF) for each year. List accounts in this column. Year 1 2 3 4 9. Create the projected Free Cash Flow Schedule for the project: Projected Free Cash Flow Schedule Year 0 Year 1 Year 2 Year 3 Year 4 OCF OCF OCF Equipment cost OCF + After-tax Salvage Value NWC + NWC Totals

Question

Need help calculating on paper, not excel image text in transcribed

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). Account Receivables 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 project's interest rate 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? 2. What is the Net Working Capital? Hint: Net Working Capital = Increase in Current Assets Increase in Current Liabilities 3. What is the total investment amount at the start of the project (i.e. year zero cash flow)? Hint: Initial investment in Year 0 is the total equipment cost + Net Working Capital 4.What is the depreciation amount for each year? 5. Calculate the book values for each year Year 1 2 3 4 6. What is the after-tax salvage value (market value of the equipment at the end of the project) After-tax salvage value = Salvage value Tax ( Salvage Value - Book Value) 7. Compute the Net Income during the project's life for each year. Note: You must list all the accounts and entries in order to earn full credit. No credit will be awarded for merely listing numbers without the associated accounts. Show the work in order to full credit List accounts in this column. Year 1 2 3 4 8. Calculate the Operating Cash Flows (OCF) for each year. List accounts in this column. Year 1 2 3 4 9. Create the projected Free Cash Flow Schedule for the project: Projected Free Cash Flow Schedule Year 0 Year 1 Year 2 Year 3 Year 4 OCF OCF OCF Equipment cost OCF + After-tax Salvage Value NWC + NWC Totals