You are starting a business that builds drinking water treatment systems for the developing world. You have estimated the initial working capital to be $285,000. You also plan to purchase assembly equipment for $734,000. The equipment is to be depreciated using MACRS property class 3. To support these initial costs, $900,000 was borrowed for a five-year loan period at a nominal interest rate of 6% (compounded quarterly). You will use your own money for the remaining initial costs. Loan payments are made in annual installments. 

You plan to replace the assembly equipment at the middle of year four and the salvage value is expected to be $340,000. The new equipment (MACRS 3) is expected to cost $850,000.

Assume an inflation rate of 3% per year for all revenues, working capital and expenses. Gross revenue for the first year is expected to be $2,500,000. The following costs will occur in the first year and will continue in subsequent years. 

 

Item	Amount
Utilities	$15,280
Labor	$411,500
Rent Paid	$66,950

 

Develop a 5-year operating income and cash flow statement for this business. Assume the corporate tax structure applies and that all capital gains or losses use the 15% rate. Also assume that the business will continue beyond the 5-year plan (no sale of equipment at the end of year five, etc.).

Calculate the Annual Equivalent for the 5-year cash flow.  MARR = 15%.