Problem: Mills Mining is considering the purchase of a new machine to expand its operatios. The total cost of the machine is $500,000. Mills Mining intends to use the following depreciation schedule.
|
Year
|
Depreciation rate
|
|
1
|
33%
|
|
2
|
45
|
|
3
|
15
|
|
4
|
7
|
• The companies will need to increase its inventories by $50,000, and its accounts payable will rise by $10,000. This net operating working capital will be recovered at the end of the project’s life (t=4).
• The company will realize an additional $600,000 in sales over each of the next four years (t = 1, 2, 3, 4). The company’s operating cost (not including depreciation) will equal $400,000 a year.
• The company’s tax rate is 40 percent.
• At t = 4 the project’s economic life is complete, but it will have a salvage value of $50,000
• The project’s WACC = 10 percent.
Required to do:
Q1. What is the initial cash outlay?
Q2. Calculate the annual depreciations
Q3. Calculate the annual net operating cash flows
Q4. What is the total amount of the termination cash flow
Q5. Calculate the project NPV?