Question

As a financial analyst, you must evaluate a proposed project to produce printer cartridges. The equipment would cost $55,000, plus $10,000 for installation. Annual sales would be 4,000 units at a price of $50 per cartridge, and the project’s life would be 3 years. Current assets would increase by $5,000 and payables by $3,000. At the end of 3 years, the equipment could be sold for $10,000. Depreciation would be based on the MACRS 3-year class, so the applicable rates would be 33%, 45%, 15%, and 7%. Variable costs would be 70% of sales revenues; fixed costs excluding depreciation would be $30,000 per year; the marginal tax rate is 40%; and the corporate WACC is 11%. a. What is the required investment, that is, the Year 0 project cash flow?

Answer 1

Answer:

($73,000)

Explanation:

The initial investment in year 0 will be arrived at by calculating all the funds required to start the project which includes:

1. The cost of the equipment to be purchased ($55,000) plus

2. All amounts required to put the equipment in a ready-for-use state ($10,000 installation costs)

3. Additional requirements in working capital (current asset increase of $5000 and payables by $3000)

Therefore Year 0 project cash flow is $55,000 + $10,000 + ($5000+$3000)= ($73,000) this total is in bracket because it is a cash outflow.