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Task1. Cupcake Corp. is considering investment of $40 million in machinery and plant. This is anticipated to make sales of $23 million in year 1, $26 million in year 2, and $30 million in year 3. Following sales are anticipated to rise by 10% each year for the remaining 2 years. The plant and machinery will be scrapped after 5 years with a salvage value of $10 million. The property and machinery belong to the 3 year recovery period class for depreciation purposes (MACRS). Cost of goods sold (COGS) is anticipated to be $8 million in year 1, $14 million in year 2, and to rise at 9% each year for the remaining 3 years. Fixed operating expenditures are $1,000,000 per year. Year-end net working capital (NWC) is given below.

The corporate tax rate is 40%. k = 000s 0 1 2 3 4 5 NWC 500k 700k 800k 800k 500k 0

problem1. Compute the free cash flows for time 0 through time 5.

problem2. Compute the (NPV) for a 12% cost of capital. Find the (IRR).

problem3. Compute the sensitivity of the investment to a change in the cost of capital (it could be as low as 8% or as high as 16%).

problem4. Should Cupcake make investment? Why or why not?

Note: They initially invest $500,000 in NWC. At the end of first year, NWC raises to 600,000 so the firm has raised its investment in NWC by $100,000. This process continues over the project’s life until all of the NWC is returned in previous year.

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M93985

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