Project A: Red Dirt Industries is looking at a project that will require an $80,000 investment in plant, property, & equipment. $20,000 in new inventory is required with half going on accounts payable. The net working capital will be returned when the project is terminated. Red Dirt expects to produce annual sales of $110,000 with associated fixed costs of $30,000 (per year) over its 5-year life. The asset will depreciate using a 5-year MACRS class life. The salvage of the equipment is $10,000. The tax rate is 25%.

Project B: Osage Products is looking at a project that will require a $1 million investment in a new computer system to manage inventory. The project reduces the cost to manage inventory costs by $300,000 per year over its 5-year life. The system depreciates using a 3-year MACRS class life. The salvage value of the equipment is $50,000 at the end of year 5. There will be no change in net working capital. The tax rate is 34%.

Q1: What is the initial investment for Project A?

Q2: What is the depreciable basis for Project A?

Q3: What is the initial investment for Project B?

Q4: What is the depreciable basis for Project B?

Q5: What is the operating cash flow in Year 3 for Project A? (Round to nearest dollar)

Q6: Realize that Project B is a cost cutting problem. It has no change in Rev/Sales. What is the EBIT for Project B in year 2? (Round to nearest dollar)

Q7: What is the operating cash flow for Project B in year 5? (Round to nearest dollar)

Q8: What is the return of NWC for Project A in the last year?

Q9: What is the tax on salvage for Project B? (Round to nearest dollar)

Q10: What is the salvage value of the equipment in Project B?