The management of Superior Products (SP) is considering a project to produce a new product. Management is analyzing this project over a 4-year horizon. SP's marginal tax rate is 50%. A worksheet for the project appears on the next page.
If management accepts the project it will immediately (in year 0) purchase a factory building and production equipment and begin production.
The factory building costs $10m. Management will depreciate the building to zero over 5 years using straight-line depreciation. Management expects the factory building will have a market value of zero in four years.
The production equipment costs $20m and falls into the 5-year MACRS life class. The depreciation percentages are as follows: year 1, 30%; year 2, 40%; years 3 - 5, 10% each year. Management expects the production equipment will have a market value of $10m in four years.
As soon as management buys the factory building and production equipment (in year 0) management will also spend $20m on net working capital (NWC). This is 25% of coming-year direct production costs. At the end of each subsequent year NWC must be 25% of coming-year direct production costs. The investment in NWC will be recaptured in four years at the end of the project's life.
Revenue forecasts from product sales are shown in the worksheet. Direct production costs are expected to total 80% of sales, as shown in the worksheet.
Compute the cash flow stream needed to reach an accept / reject decision for this project. (You DO NOT need to determine whether the project is acceptable.)
Attachment:- Assignment File.rar