Question
Your company is thinking of commencing a new production run of its popular smartphone. The following information relates to this project The expected productive life
Your company is thinking of commencing a new production run of its popular smartphone. The following information relates to this project The expected productive life of the production equipment is 4 years. The initial outlay for computer equipment will be $8 million. This will be depreciated on a straight-line basis over the life of the project to a book value of zero. The new production will result in incremental revenue of $6 million and incremental costs (excluding depreciation) of $1.5 million. The project will require additional net working capital of $1.5 million. The corporate tax rate is 30% and the companys cost of capital for this project is 12% p.a
Fortunately, your company has also provided you with the following table, which outlines the various cash flows throughout various stages of the projects life: Year 0 Years 1-4 Year 5 Revenue 6,000,000 Costs -1,500,000 Depreciation -2,000,000 EBIT 2,500,000 Tax -750,000 Earnings 1,750,000 Depreciation 2,000,000 Outlay -8,000,000 Net Working Capital -1,500,000 1,500,000 Free Cash Flows -9,500,000 3,750,000 1,500,000
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