The production line produces a product which currently has annual sales of $1,000,000 and has a contribution to the business beyond ingredients of $500,000. Your line is currently operating at full standard capacity. You are putting in new equipment which will make the line more efficient and last for 10 years. The equipment will increase the capacity of the line by 30%. - so, add capability to produce $300,000 more per year and will eliminate 3 positions of manual labor when fully operational the second year. A manual position of labor costs $30000 per year with benefits. A 6-month supply of ingredients is always kept. It is expected that the learning curve will result in zero increased capacity in year 1 but the full 30% in year 2 . The equipment will costs $600000 engineering and installation will cost $100000. Sales will grow at a rate so all production can be sold. Advertising and promotion to get that growth will cost $50,000 per year. The company has a WACC of 15% but uses a hurdle rate of 18% for projects of this risk type. OUTLINE THE CASH FLOWS IN THE CHART BELOW - please note some cash flows are positive and some are negative - you will need to make sure they sum appropriately EVALUATE THE INVESTMENT WITH PAYBACK, IRR and NPV CASH FLOW CALCULATIONS: Capacity of new line, sales growth, additional ingredients, additional advertising, savings from eliminating manual positions, increase in income before taxes, Depreciation, Estimated taxes at 35%, increase in income after taxes + depreciation, additional inventory, cost of equipment, cost of installation, and Net Cash Flow.

CASH FLOW CALCULATIONS

year 0 year 1 year 2 year 3 year4 year 5 year6 year7 year8 year9 year 10

Capacity of new line
sales growth
additional ingredients
additional advertising
savings from eliminating manual positions
increase in income before taxes
Depreciation
Estimated taxes at 35%
Increase in income after taxes + depc
additional inventory
cost of equipment
cost of installation
NET CASH FLOW
	Payback
	IRR
	NPV