Thus far we have worked on capital investment cash flows - we now turn to operating cash flows. Begin by calculating total sales and any other relevant revenues, then subtract relevant operating costs and depreciation (remember - using MACRS schedule) to arrive at EBIT. Remove taxes and add back depreciation to arrive at the true operating cash flow for a given year.

What are the operating cash flows for year 1?

Capital Budgeting Med-Tech (MT) is considering an expansion to its product line of nanites. The new addition would be specialized to the healthcare industry for the treatment of brain and nervous system related ailments. Determine the project's cash flows given the following information. Then compute NPV and IRR. 1. Expected sales over the 3 year life of the project are: 8500 , 23,000 , and 20,000 units, priced at $80 per unit. A unit is defined as a batch of 20 thousand nanites. 2. Production of the new robots requires an investment of $1.3M in new equipment, which would be depreciated using MACRS 3 year asset class. MACRS rates below. 3. The expansion would use land purchased 5 years ago for $500k. The current market value of the land is estimated to be $570k. The projected market value of the property in 3 years is $580k. 4. For each period, required working capital is estimated to be 10% of next year's sales. 5. Salvage value of the new equipment is projected to be $120k in three years. 6. MT has spent $400k in R\&D and marketing research on the proposed expansion to date. 7. Fixed cash operating expenses would be $80k per year. 8. Variable cost per unit are estimated to be $20. 9. The marginal tax rate is 30% 10. RRR=17%. MACRS Depreciation Rates - 3 Year Recovery Period