AnimalChin! Co. has decided to sell a new line of longboards: \" The Veloce.\" T
ID: 2519832 • Letter: A
Question
AnimalChin!Co. has decided to sell a new line of longboards: "The Veloce."These longboards will be sold for $233 per unit and have variable costs of $100 per unit. The company has spent $143,000 for a marketing study which determined that the company will sell 1,800,000 boards in year 1. Sales will stay the same until the project is discontinued in year 8. The same marketing study also mentioned that some old clients are likely to switch to the new board. Sales of the other AnimalChin!board The Classicare likely to decrease by 100,000 units each year, the price of The Classic price $256, and variable costs are $111. Space rental, marketing and advertisement costs, and administrative expenses will total $19,000,000 per year. A few months ago, the company has also spent $3,000,000.00 to test new wheels and shock pads and they recently repaired some of their machines for $2,000,000.00. Three of these machines are currently not in use, they could be used for the production of The Veloce could be sold today for $24,000,000.00 total (their initial cost 3 years ago was $90,000,000.00 (the company is currently depreciating these assets straight-line to zero book value over 5 years). The plant and equipment investment required for this project is $900,000,000.00 and will be depreciated on a straight-line basis to a zero book value over the next 8 years. Despite depreciating to zero for tax reasons, the company believes that the market value of the equipment in 8 years will be $40,000,000.00. The company will sell the equipment. The production of The Veloce will require an immediate increase in inventory of $ 125,000,000.00 that will be returned at the end of the project. The tax rate is 40%.
Calculate the annual operating cash-flow (OCF) for the project for year 1 to year 8.
Now focus on year 0. What should you take into account as inflow/outflow of cash for year 0 when you start the project?
Finally, focus on year 8, the termination year of your project. What should you take into account as inflow/outflow of cash besides year 8 OCF?
5. Based on points 1-4 fill the CFFA table and compute the Cash-flow from assets (CFFA) for Year 0 to year 8. Copy and paste from excel if needed. Year 2 Item OCF Year 0 Year 1 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 CFFAExplanation / Answer
Calculation of annual operating cash flows:-
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Sales 419400000 419400000 419400000 419400000 419400000 419400000 419400000 419400000 (1800000*$233)
(-)Variable costs 180000000 180000000 180000000 180000000 180000000 180000000 180000000 180000000 (1800000*$100)
(-)Depreciation 107500000 107500000 107500000 107500000 107500000 107500000 107500000 107500000 (900000000-40000000)/8
EBIT 203900000 203900000 203900000 203900000 203900000 203900000 203900000 203900000
(-)Tax (40%) 81560000 81560000 81560000 81560000 81560000 81560000 81560000 81560000
(+)Depreciation 107500000 107500000 107500000 107500000 107500000 107500000 107500000 107500000
OCF 229840000 229840000 229840000 229840000 229840000 229840000 229840000 229840000
At the start of the project year 0:-
Initial outflow of cash = $900,000,000.00 + $125,000,000.00 + $143,000 = $ 1025,143,000.00
At the termination of the project year 8:-
Besides the OCF there is an inflow of cash as calculated below.
Inflow of cash = $40,000,000.00