ABC Corp. is a company with many billions of dollars in its capital base (Common + Debt + Preferred). As its Assistant Treasurer, you’ve been tasked with analyzing a new investment in equipment. You are to create a 4-year Cash Flow projection using these assumptions:
o A $2 million investment in equipment will be made immediately
o The project will end after 4 years
o Three years ago, ABC lost $1 million investing in a similar piece of equipment.
o The company will:
- incur working capital needs immediately of $50,000,
- make $350,000 of net income in year 1, which will grow by $100,000 each year,
- have $30,000 of annual depreciation (not increasing),
- finance it by withdrawing $2 million from the bank, currently earning 2% per year.
o The equipment will have an after-tax salvage value of $100,000 after 4 years.