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Q1) Best Company has opportunity to expand capacity of present manufacturing equipment with following expected results.

Annual Sales Volume in Units 250,000
Annual Cash Fixed Costs (ex depreciation) $3,800,000
Selling Price per Unit $60
Variable Cost per Unit $29

Capital expenditures for purchase of new equipment will be= $10,000,000.  Old equipment should be cleared from site to install new equipment. Proceeds of $80,000 are expected from removal and sale of old equipment, which has \book value of $50,000. Cash flows from tax effects are realized at the end of year when tax return is filed.  As soon as new equipment is up and running, accounts receivable will increase by $500,000 and will be released at ending of equipment's useful life. Annual cash fixed costs exclude depreciation charges. There is no salvage value on new equipment. Company has 15% cost of capital and income tax rate is 40%. Equipment will create cash flows for four years (that is, useful life) and appropriate 3-year MACRS depreciation schedule is as follows: 0.333, 0.445, 0.148, and 0.074.  Earnings for overall company are positive. 

a) Create cash flow profile which shows net cash flows for each time period (i.e., time 0, 1, 2, 3, and 4).  Compute NPV of the project. 

b) Determine payback period (be precise)?

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M919057

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