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Rainbow Ltd is considering producing a small microprocessor. It had to purchase a machine for the production. The machinery's invoice price would be $11,000,000 and
Rainbow Ltd is considering producing a small microprocessor. It had to purchase a machine for the production. The machinery's invoice price would be $11,000,000 and the physical life is 5 years and the salvage value will be $1,000,000 at the end of 5 years. The depreciation allowance is calculated on a straight-line basis. The project life is 4 years and the machine is expected to sell at a price of $4,000,000 after 4 years of use. Production and units sold during the 4 years are expected to be as follows: 10,000 units, 25,000 units, 30,000 units and 20,000 units. The selling price per unit for the first year is expected to be $500 and the price will increase at 5% per year. The production cost per unit for the first year is expected to be $350 and will increase at 10% per year. Also, some new working capital, total $100,000, would be required, but it would be recovered the end of the project's life. The profit tax rate is 20% and the cost of capital is 10%. Estimate the relevant cash flows. Should the company go for the project? You can round your calculations of cash flow to the nearest dollar
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