International Foods Corporation (IFC) currently processes seafood with a unit it purchased several years ago. The unit, which originally cost $500,000, currently has a book value of $250,000. IFC is considering replacing the existing unit with a newer, more efficient one. The new unit will cost $700,000 and will require an additional $50,000 for delivery and installation. The new unit will also require IFC to increase its investment in initial net working capital by $40,000. The new unit will be depreciated on a straight-line basis over 5 years to a zero balance. IFC expects to sell the existing unit for $275,000. IFC's marginal tax rate is 40 percent.
If IFC purchases the new unit, annual revenues are expected to increase by $100,000 (due to increased processing capacity), and annual operating costs (exclusive of depreciation) are expected to decrease by $20,000. Annual revenues and operating costs are expected to remain constant at this new level over the 5-year life of the project. IFC estimates that its net working capital investment will increase by $10,000 per year over the life of the project. At the end of the project's life (5 years), all working capital investments will be recovered. After 5 years, the new unit will be completely depreciated and is expected to be sold for $70,000. (Assume that the existing unit is being depreciated at a rate of
$50,000 per year.)
a. Calculate the project's net investment.
b. Calculate the annual net cash flows for the project.