Question
Suppose Trahan Co. is considering a three-year expansion plan in machinery with initial investment of $4,000,000. The machinery will be depreciated using straight-line method over
Suppose Trahan Co. is considering a three-year expansion plan in machinery with initial investment of $4,000,000. The machinery will be depreciated using straight-line method over three years after which the value of asset will be $500,000. Machinery is expected to generate incremental sales of $3,000,000 with operating costs of 1,400,000 (including depreciation) in year one. Sales are expected to grow by 10% for year two and three, and operating profit margin is expected to remain constant. The applicable tax rate is 35% and the required return on this project is 15%. What are Year 1, 2, and 3 project cashflows ?
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