Case Scenario:
You have been hired as a financial consultant to Jane Corporation, a large, publicly traded firm. The company is looking at setting up a manufacturing plant overseas. The project will be for five years. The company bought some land three years ago for $4.2 million in anticipation of using it as a possible plant site, but the project was abandoned. The land was appraised last week for $2.0 million. The company wants to build its new manufacturing plant on this land at a cost of $11.9 million ($3.9 million for the building and $8 million for the equipment). Jane Corporation uses straight-line depreciation for the building and will depreciate the plant over 39 years to a zero salvage value. Jane Corporation uses the MACRS 3 years equipment schedule for the equipment; applicable percentages are 33%, 45%, 15% and 7%. At the end of the project (i.e., the end of 5 years), Jane Corporation best estimate is that the plant (including the land) can be sold to the foreign government for $ 6 million. The company expects annual pretax operating income ( after operating expenses but before depreciation and taxes) to be $3,250,000. The tax rate is 40%. What is the initial, annual operating and terminal cash flows that will be used to make the capital budgeting decision? Please prepare a table ( in excel) to show the project cash flows.