Question 1

The Sisyphean Corporation is considering investing in a new widget manufacturing machine. The cost of the machine is $40,000 and tax regulations require the machine to be depreciated over five years to a residual value of $0. The widget manufacturing machine will result in sales of 2,000 widgets per year. The price per widget that Sisyphean will charge its customers is $18 each and is to remain constant. The widgets have a cost per unit to manufacture of $10 each. At the end of three years, Sisyphean expects demand to fall to zero due to anticipated advances in widget production technology. At that point in time, production will cease and Sisyphean expects to be able to sell the machine for $7,500. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 5% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 4% of its annual sales in accounts payable. Net working capital needed must be available from the beginning of the project, but will no longer be needed once the widget machine is sold. The firm is in the 30% tax bracket, and has a cost of capital of 12%.

Required:

1. Estimate the after-tax cash flows for the project. To do this you must present two tables. The first table should show the inputs of the accounting flows to determine the after-tax income. The second table should show the inputs to determine the after-tax cash flows. (This means you should NOT use the tax shield approach). IMPORTANT: You must show each input in your table as a separate row. DO NOT group inputs together. (14 marks)

Answer Question 1 here:

Table 1: Accounting Flows (8 marks)