Consider the case of Collins Construction Co.: Collins Construction Co. currentl
ID: 2785080 • Letter: C
Question
Consider the case of Collins Construction Co.: Collins Construction Co. currently earns annual revenues of $600,000 and incurs total operating expenses (excluding depreciation and interest expense) of 47.50% of revenues. Its earnings are taxed at a rate of 40%. Today, its budgeting committee is evaluating the purchase of a new forklift. The forklift is expected to cost $75,000 plus $4,000 in freight and setup expenses, and will be depreciated using straight-line depreciation. It is expected that the forklift will have a useful life of 10 years and a salvage value equal to 25.00% of its purchase price of $75,000. It is expected that the forklift will be sold for its book value, such that no capital gain or loss will be realized. It is further expected that the forklift will cause a 20.00% increase in the firm's annual sales and total operating expenses (excluding depreciation and interest expense). If the forklift is purchased, the firm will require an additional 10,000 in net working capital (NWC). Given this information, complete the following analysis: Question Answer What is the annual depreciation expense for the forklift? What is the net investment (NINV) of the investment? What are the net annual operating after-tax cash flows associated with this project? What is the project's last year (terminal) cash flow?Explanation / Answer
What is the annual depreciation expense for the forklift ?
Annual depreciation expense = $ ( 75,000 + 4,000 - 18,750) / 10 = $ 6,025
What is the net investment ?
Net investment = Installed cost of the forklift + Additional working capital = $ 79,000 + $ 10,000 = $ 89,000.
Net annual operating after-tax cash flows of the project :
Incremental EBITDA = $ 600,000 x 52.5 % x 20 % = $ 63,000.
Net annual operating after-tax cash flows = Incremental EBITDA x ( 1 - T ) + Depreciation x T = $ 63,000 x 0.60 + $ 6,025 x 0.40 = $ 40,210.
Terminal cash flows :
Terminal cash flows = Working Capital Released + Salvage Value of Equipment = $ 10,000 + $ 18,750 = $ 28,750.