Question
Your firm is considering introducing a new product into the current markets for their best product. The machine to produce the new product will cost
Your firm is considering introducing a new product into the current markets for their best product. The machine to produce the new product will cost $525,000, and will require another $25,000 to ship it and install it in place. It will also require an increase in net working capital of $4,000 up front, which will be recovered at the end of the project. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5, and 5.76% in year 6).
Marketing believes they can sell the new product for $150, and that they will sell 4,500 units in the first year, 4,000 units in the second year, 3,500 units in the third year, 3,000 units in the fourth year, and 2,000 units in the fifth and final year of the project. Variable costs for the new product are 30% of the sales price, and fixed costs are $225,000 per year. At the end five years it is estimated that the new machine will have a salvage (market) value of $25,000. The appropriate discount rate for the new machine is 9.25%. The firm's tax rate is 21.0%.
What is the net operating cash flow for year 1-5? Report the figure to the nearest dollar, and enter negative numbers with a minus sign.
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