Question: You and some friends are thinking of starting; a small business. If you undertake the venture, it will be incorporated. You would first need to purchase a piece of property for $350,000. Then you will construct a factory that will cost $ 1,500,000. This equipment will be depreciated by the straight-line method over five-years. You estimate you could run the factory for six years, after which the plant and property could be sold for $500.000
You estimate that during the first year of operation, sales would be $600,000, then you would expect sales to grow by about 8% per year for the following 3 years. After that, sales would probably begin to decline by 7% per Year. You expect annual fixed costs to be roughly $110,000, and variable costs to be about 28% of sales
From the outset, you would probably need to carry $150,000 in net working capital on the balance sheet. You feel that at the beginning of the fifth year of operations, net working capital requirements would probably decline by S40.000.
You will pay taxes on the venture according to the normal corporate tax schedule (20%). If the weighted average cost of capital is equal to 14 percent. Estimate the annual cash flows and decide whether it is economical to undertake the venture. In addition, explain whether straight-line or accelerated depreciation is better.