TTT Inc. currently has one product, low-priced cordless drills and a variety of drill bits. TTT Inc. has decided to sell a new line of medium-priced cordless drills. The project is expected to last 10 years. The plant and equipment required for producing the new line of drills costs $10 million and will be depreciated down to zero over 20 years using straight-line depreciation. It is expected that the plant and equipment can be sold for $6 million at the end of 10 years. The plant will be built in a land (unused at the moment) that was purchased for $2 million three years ago (however, the land was never used as the project for it was not launched). Today, that land can be sold for $3 million (net of taxes). If the land is used in this project, it is estimated that it would be sold at the end of the project (10 years) for $3 million.

Sales for the new line of drills are estimated at $10 million per year. Variable costs are 60% of sales. The fixed costs each year will be $3 million. The company has spent $1.5 million in research and a marketing study that determined due to the introduction of the higher end compatible cordless drill, the sales of drill bits by the company will increase by $3 million in a year. The production variable cost of the drill bits is $1 million a year. However the sales of existing cord drills will dropped (transferred sales to new drill which are already reflected the above given sales estimate for new drills) by $2 million a year, the variable costs for these sales is $1 million a year. The new drills will also require, today, an increase in net working capital of $2.5 million that will be returned at the end of the project. The tax rate is 20 percent and the required rate of return for the project is 15%.

Part III: Computing Operating Cash Flows (OCF)

23. What is the amount of annual sales (revenues) for this project?

24. What is the annual amount of cost of goods sold (CGS) for these sales?

25. Are there erosion of sales effects in this project?Answer yes or no (lower case)

26. What is the amount of erosion of annual sales for this project?

27. What is the annual variable costs of the erosion of sales?

28.Are there synergies effects in this project? Answer yes or no (lower case)

29. What is the annual amount of additional sales of existing products (synergies)?

30. What are the annual variable costs associated with the synergy sales?

31. What is the annual amount of fixed costs for this project?

32. Are there any other annual costs for this project that must be considered in the income statement? Answer yes or no (lower case)

33. What is the annual EBITDA?

34. What is the annual depreciation?

35. What is the annual EBIT?

36. What is the amount of annual taxes?

37. What is the annual net income (NI)?

38. What is the annual OCF?