Question
The Big Salt Company is considering making a bid to supply the highway department with rock salt during the winter. The contract will guarantee a
The Big Salt Company is considering making a bid to supply the highway department with rock salt during the winter. The contract will guarantee a minimum of 25,000 tons in each year, but the actual quantity may be above that amount if conditions warrant. Management believes the actual quantity will average 40,000 tons per year. The firm will need an initial $1,500,000 investment in processing equipment to get the project started. The contract will last for 5 years and is not expected to be renewed. The accounting department has estimated that annual fixed costs will be $500,000 and that variable costs should be about $94 per ton of the final product. The new equipment will be depreciated using MACRS with a 3-year class life. At the end of the project, it is estimated that the equipment could be sold for $90,000. The marketing department estimates that the state will grant the contract at a selling price of $150 per ton. The engineering department estimates that the project will need an initial net working capital investment of $126,000. The firms WACC is 12% and the marginal tax rate is 35%.
Calculate the Net Initial Investment, the Net after-tax Operating Cash Flows, and the Terminal Value.
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