HW 10.a

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.37 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,675,000 in annual sales, with costs of $645,000. If the tax rate is 21 percent, what is the OCF for this project?

Depreciation each year = (Purchase cost - Salvage Value) / Useful life = ($2,370,000 - 0) / 3 = $790,000 Sales = $1,675,000 Costs = $645,000 Depreciation = $790,000 Net Income before taxes = S - C - D = 1,675,000 - 645,000 - 790,000 = $240,000 Taxes (21%) = 0.21(240,000) = $50,400 Net income = 240,000 - 50,400 = $189,600 Operating Cash Flow= Depreciation + Net income OCF = 790,000 + 189,600 = $979,600

Fill in the missing numbers for the following income statement. Sales: $668,000 Costs: $430,600 Depreciation: $103,400 b. Calculate the OCF c. What is the depreciation tax shield?

EBIT: 668,000-430,600-103,400= $134,000 Taxes (23%): 0.23(134,000) = $30,820 Net income: 134,000-30,820 = $103,180 b. OCF = EBIT + Depreciation - Taxes OCF = 134,000 + 103,400 - 30,820 = $206,580 c. Depreciation tax shield = Tax Rate x Depreciation = 0.23 x 103,400 = $23,782

Winnebagel Corp. currently sells 26,000 motor homes per year at $64,000 each, and 10,000 luxury motor coaches per year at $101,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 21,000 of these campers per year at $12,000 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 2,300 units per year and reduce the sales of its motor coaches by 1,000 units per year. What is the amount to use as the annual sales figure when evaluating this project?

Sales due solely to the new product line are:= 21,000 x $12,000 = $252,000,000 Increased sales of the motor home line occur because of the new product line introduction 2,300($64,000) = $147,200,000 Erosion of luxury motor coach sales is also due to the new campers 1,000($101,000) = $101,000,000 Loss in salesis relevant. The net sales figure to use in evaluating the new line is thus: $252,000,000 + $147,200,000 - $101,000,000 = $298,200,00

Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $4.6 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $4.9 million. The company wants to build its new manufacturing plant on this land; the plant will cost $12.1 million to build, and the site requires $730,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?

The initial investment is the total amount spent or the amount of cash outflow. Proper cash flow amount = Cost of land (present cost of land) + Cost of Plant + Cost of Grading Proper cash flow amount = $4,900,00 + $12,100,000 + $730,000 = $17,730,000