Corporate Finance Chapter 9 The managers of Classic Autos Incorporated plan to m
ID: 2799440 • Letter: C
Question
Corporate Finance Chapter 9 The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds. The necessary foundry equipment will cost a total of $4,000,000 and will be depreciated using a five-year MACRS life. Projected sales in annual units for the next five years are 300 per If sales price is $27,000 per car, variable costs are $18,000 per car, and fixed costs are $1,200,000 annually, what is the annual operating cash flow if the tax rate is 30%? The equipment is sold for salvage for $500,000 at the end of year five. What is the after tax cash low of the salvage? Net working capital increases by $600,000 at the beginning of the project (Year 0) and is reduced back to its original level in the final year. What is the ntal cash flow of the project? Using a discount rate of 12% for the project, determine whether the project be accepted or rejected with the NPV decision model MACRS(The Modified Accelerated Cost Recovery System) V Year One 0.20 Year Two 0.32 Year Three 0.192 Year Four 0.1152 Mear Five-0.1152 :3.uue o leo aloo 81 Setou ood ) ed 1,2- cosh Def B8LT 76 46 80 512 Seo 120 u6 o 84 ueto 717Explanation / Answer
salvage value = 500000
Depriciation remaining at the end of year 5 = 4000000*5.76% = 230400
After tax cash flow = (500000-230400)*30%
= 269600*30%
= 80880
Calculation of NPV -
yes accept the proposal as NPV comes positive.
Please note all values are in $.
Please comment in case of any clarification required.
MACRS Rate 20% 32% 19.20% 11.52% 11.52% NPV Projected sales in units 300 300 300 300 300 Year 0 1 2 3 4 5 Initial invesntment 4000000 Net working capital 600000 sales value (27000*300) 8100000 8100000 8100000 8100000 8100000 less variable cost (18000*300) 5400000 5400000 5400000 5400000 5400000 Contribution 2700000 2700000 2700000 2700000 2700000 less fixed cost 1200000 1200000 1200000 1200000 1200000 less Depriciation 800000 1280000 768000 460800 460800 EBIT 700000 220000 732000 1039200 1039200 add Salvage value 500000 Dep. remaining to be claimed 230400 less Tax @30% 210000 66000 219600 311760 392640 EAT 490000 154000 512400 727440 1146560 add Depriciation 800000 1280000 768000 460800 460800 Net working capital 600000 Cash flow 1290000 1434000 1280400 1188240 2207360 Discounting @12% 1 0.892857 0.797194 0.71178 0.635518 0.567427 -4600000 1151786 1143176 911363.4 755148 1252515 613988.51