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B D E F G H I 6 Catzz Corp is considering making and selling Trolls' themed cat sweaters. 7 Catzz expects to sell the sweaters for $35 each; this project is expected to last three years due to changes in popular movies. 8 Catz will need to buy equipment costing $100,000; this equipment will use the new 2018 tax laws so will have bonus depreciation year 1. 9 Variable costs are expected to be $20 each sweater; this includes both material costs and licensing fees to Dreamworks. 10 Fixed costs are expected to be $55,000 a year which includes advertising and management costs. 11 Catzz expects to sell 4,000 sweaters in the first year, 6,000 and 8000 sweaters the third year. 12 At the end of the third year, Catzz will end the project and believes it can sell the machine for $40,000 despite the machine's zero book value (due to 2018 tax laws). 13 Net working capital needs are $10,000 in year 0 and 10% of revenues in years 1-3. Net working capital will be liquidated in year 3. 14 Catzz has a marginal tax rate of 21% and this project has a required rate of 12% due to its high risk. (Assume Catzz is a very profitable company which can take tax credits when EBIT is less than zero.) 15 Assume Catzz is a very profitable company which can take tax credits when EBIT is less than zero. 16 Information from above in table form: 17 Cost of equipment year 0 $ 100,000 installed 18 Bonus depreciation on equipment 19 Expect to sell equipment for $ 40,000 in year 3 20 Year year 1 year 2 21 Quantity sold per year 0 4000 6000 8000 22 Price $ 35.00 per sweater 23 Variable costs $20.00 per sweater 24 Fixed costs $ 55,000.00 per year 25 Net working capital year 0 10000 year o 26 Net working years 1-3 10% of revenues 27 Net working capital will be liquidated in year 3 28 Catzz marginal tax rate 21% 29 Required rate on project 12% year 3 1 2 3 39 4. Set up the cash flows for EBIT and Operating Cash Flows each year 1-3 40 Year 41 Revenues 42 -Variable Costs 43 -Fixed Costs 44 -Depreciation 45 Earnings before Interest and Taxes 46 -Taxes 47 Depreciation 48 Operating Cash Flow B D E F G H I 6 Catzz Corp is considering making and selling Trolls' themed cat sweaters. 7 Catzz expects to sell the sweaters for $35 each; this project is expected to last three years due to changes in popular movies. 8 Catz will need to buy equipment costing $100,000; this equipment will use the new 2018 tax laws so will have bonus depreciation year 1. 9 Variable costs are expected to be $20 each sweater; this includes both material costs and licensing fees to Dreamworks. 10 Fixed costs are expected to be $55,000 a year which includes advertising and management costs. 11 Catzz expects to sell 4,000 sweaters in the first year, 6,000 and 8000 sweaters the third year. 12 At the end of the third year, Catzz will end the project and believes it can sell the machine for $40,000 despite the machine's zero book value (due to 2018 tax laws). 13 Net working capital needs are $10,000 in year 0 and 10% of revenues in years 1-3. Net working capital will be liquidated in year 3. 14 Catzz has a marginal tax rate of 21% and this project has a required rate of 12% due to its high risk. (Assume Catzz is a very profitable company which can take tax credits when EBIT is less than zero.) 15 Assume Catzz is a very profitable company which can take tax credits when EBIT is less than zero. 16 Information from above in table form: 17 Cost of equipment year 0 $ 100,000 installed 18 Bonus depreciation on equipment 19 Expect to sell equipment for $ 40,000 in year 3 20 Year year 1 year 2 21 Quantity sold per year 0 4000 6000 8000 22 Price $ 35.00 per sweater 23 Variable costs $20.00 per sweater 24 Fixed costs $ 55,000.00 per year 25 Net working capital year 0 10000 year o 26 Net working years 1-3 10% of revenues 27 Net working capital will be liquidated in year 3 28 Catzz marginal tax rate 21% 29 Required rate on project 12% year 3 1 2 3 39 4. Set up the cash flows for EBIT and Operating Cash Flows each year 1-3 40 Year 41 Revenues 42 -Variable Costs 43 -Fixed Costs 44 -Depreciation 45 Earnings before Interest and Taxes 46 -Taxes 47 Depreciation 48 Operating Cash Flow