Question
The manji Company is evaluating the proposed acquisition of a new milling machine. The machines base price is $13,000. The machine will be depreciated straight-line
The manji Company is evaluating the proposed acquisition of a new milling machine. The machines base price is $13,000. The machine will be depreciated straight-line to zero for over its 3 years tax life and afterwards it will be worthless. Use of the new machine requires an increase in net working capital. According to the predictions, net working capital need is 13% of capital outlay and this will increase by 5% per year. It is expected that the project will generate a Net Sales of $55,300 in year one and it will increase by 5% in following years. Operating cost is expected 60% of Net Sales. Boomerangs marginal tax rate is 0.35 and WACC is 0.20.
a. Calculate FCF of the project by using the template below.
| 0 | 1 | 2 | 3 | |
NET SALES | |||||
(Operating Cost) | |||||
(Depreciation) | |||||
EBIT | |||||
Tax | |||||
NOPAT |
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Depreciation |
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OCF |
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Capital outlay |
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NWC |
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Delta NWC |
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FREE CASH FLOWS |
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Calculate the NPV of the project
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