Question
SteelTech will purchase new equipment for $1,500,000.The additional micro-processors will be manufactured in a building SteelTech purchased eight years ago for $4,200,000.The building will be
SteelTech will purchase new equipment for $1,500,000.The additional micro-processors will be manufactured in a building SteelTech purchased eight years ago for $4,200,000.The building will be retooled for the new project at a cost of $500,000, which includes building permit fees of $25,000.
The purchased equipment will be depreciated using Modified Accelerated Cost Recovery System (MACRS) depreciation schedule (see below), and sold for $250,000 in year 5. The projected revenue for year 1 is $550,000.Subsequent year's revenues will increase by eight percent of the preceding year's revenues (i.e., year 2 revenues equals 1.08 *$550,000).This expansion project will result in an annual loss of revenues from an existing manufacturing operation of $100,000.Operating expenses (excluding depreciation and amortization) is estimated at 20 percent of net revenues.Operating net working capital will rise by $250,000 and $300,000 in years 1 and 2, respectively.This investment in operating net working capital fully reverses in the final year of the project.Annual interest expense is fixed at $35,000.
MACRS Schedule
Year 1: 33.33%
Year 2: 44.45%
Year 3: 14.81%
Year 4: 7.41%
Tax Rate: 40%
What is the project's Free Cash Flows (FCF) for years 1 through 5?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started