Shirley industries is analyzing an average risk project, and the following data has been developed. Annual unit sales will be constant but the sales price will increase with inflation which is to be 5%. Fixed costs will also be constant but variable costs will rise with inflation. The project involved buying a $100,000 piece of equipment that will last for 3 years and be straight lined depreciated to zero. At the end of of the project there will be a $14,500 after tax salvage value . this is just one project for the firm so any losses can be used to offset gains on other projects. What is the 1 year operating cash flow? What is the 2 year depreciation expense? What is the 3 year total cash flow? What is the projects IRR, using a 10% WACC. Lastly would you recommend Shirley accept of reject the project?
WACC…. 10%
Net investment cost( depreciable basis…$100,000
Units sold a year… $40,000
Average price per unit…$25.00
Fixed op.cost excl depreciation (constant)…$150,000
Variable op. cost/unit year 1…33.33%
Tax rate… 40%
After tax salvage value…$14,500
Question
Year 1 OCF?
Year 2 depreciation?
Year 3 total CF?
IRR
Accept of reject?