3. The chemical company IMC is considering a new line of fertilizer. IMC has alr
ID: 2804134 • Letter: 3
Question
3. The chemical company IMC is considering a new line of fertilizer. IMC has already paid $200,000 for a detailed economic study of the project. The study made the following forecast regarding the project's economics: Rev $8,000,000 18,000,000 $7,000,000 Year Variable Costs would be 60% of revenues Fixed Costs would be $800,000 each year . Project requires a $6,000,000 investment in Plant, Property, and Equipment, which can be depreciated over the life of the project using straight-line depreciation The investment in plant, property, and equipment can be sold (salvaged) at the end of the project for 20% of its initial value. o Project requires an aggregate investment in networking capital for any time period to be equal to 15% of the subsequent (following) year's revenue projection. For example the aggregate Working Capital requirement at Year 0 would be 15% of the Year 1 revenue projection; the aggregate working capital requirement at Year 1 would be 15% of the Year 2 revenue projection, etc Other information about IMC: Corporate Tax Rate is 40% IMC's Weighted Average Cost of Capital is 13% (Discount Rate) · Calculate the After Tax Cash Flows for the Project (30 POINTS).Explanation / Answer
Capital spending in year 3 is the salvage value of the property and working capital working is below, balance in working capital is assumed to be recovered at end of year.
Ref Particulars Year 0 Year 1 Year 2 Year 3 a Sales revenue 80,00,000 1,80,00,000 70,00,000 b Less: variable costs 48,00,000 1,08,00,000 42,00,000 Less: Fixed costs 8,00,000 8,00,000 8,00,000 Less: depreciation 6,00,000 6,00,000 6,00,000 Profit before tax 18,00,000 58,00,000 14,00,000 Less: tax@ 40% 7,20,000 23,20,000 5,60,000 Profit after tax 10,80,000 34,80,000 8,40,000 Add: depreciation 6,00,000 6,00,000 6,00,000 c Annual operating cash flow 16,80,000 40,80,000 14,40,000 working capital cash flow (12,00,000) (15,00,000) 16,50,000 10,50,000 Capital spending (60,00,000) (12,00,000) Cash flow for the year (72,00,000) 1,80,000 57,30,000 12,90,000