As the financial manager of Xeroz Printing Inc., you have been asked to compute the cash flows of a proposed project for the production of printing paper. The equipment would cost $120,000, plus $10,000 for installation. Annual sales would be 5,000 units at a price of $20 per pack, and the project’s life would be 3 years. Payables would increase by $3,000 and current assets by $5,000. At the end of 3 years, the equipment could be sold for $10,000. Depreciation would be based on the MACRS 3-year class; so the applicable depreciation rates would be 33%, 45%, 15%, and 7%. Variable costs (VC) would be 70% of sales revenues, fixed costs excluding depreciation would be $25,000 per year, and the marginal tax rate is 35%.
Create the depreciation schedule of the equipment.
What is the equipment’s book value at the end of the project’s life?
Book value = Initial Cost – Accumulated Depreciation
Compute the after-tax salvage value of the equipment
After-tax salvage value = Salvage Value – (Tax * (Salvage Value – Book Value)
Create net income statements for the three years of the project’s life
Compute the Operating Cash Flows (OCF)
OCF = EBIT + Depreciation – Taxes
Compute the Free Cash Flows (FCF) of the project
Use the Projected Free Cash Flow format in the lecture notes.