Mills Mining is considering an expansion project. The proposed project has the f

ID: 2784578 • Letter: M

Question

Mills Mining is considering an expansion project. The proposed project has the following features. The

project has an initial cost of $578-- this is also the amount which can be depreciated using the following

depreciation schedule: Year 1 is 33%, Year 2 is 45%, Year 3 is 15%, and Year 4 is 7%. If the project is

undertaken, at t = 0 the company will need to increase its inventories by $91, and its accounts payable will

rise by $77. This net operating working capital will be recovered at the end of the projects life (t = 4). If the

project is undertaken, the company will realize an additional $605 in sales over each of the next four years

(t = 1, 2, 3, 4). The company’s operating cost (not including depreciation) will equal $219 a year. The

company’s tax rate is 40 percent. At t = 4, the projects economic life is complete, but it will have a salvage

value of $88. The projects WACC = 10 percent. What are the one-time cash flows associated with ending

the project (i.e. terminal Cash Flows)? Note, we only want terminal cash flows, not operating cash flows in

the last year.

Terminal cash flows are the cash flows that will occur only on end of the project.

Terminal Cash flows = Working Capital recovered + Salvage Value (net of Tax)

Terminal Cash flows = ($91 + $77) + $88 x (1 - 0.40) = $220.80