A company is adding a new line to their product mix
• Spent 100,000 over the last two years to rehabilitate the production site
• The machines invoice is $240,000. IT will have a four year life, but it is placed on MACRS 5 year class. Expected salvage value of $38,000 after 4 years.
• New line will generate 1,250 per year for four years.
• Production costs are $100 first year
• The units can be sold for $200
• Sale price and cost expected to increase 3% per year.
• New working capital of the new line should be equal to the first year sales revenue.
• New product is expected to decrease sales of other lines in the firm by $50,000 per year.
• Tax rate 35%
• The firm is all equity:
o $2.25 per dividend
o $53.75 stock price
o Dividends expected to grow 4% per year
o Beta 1.17
o Treasury bills yield 3.45%
o Market Risk premium: 4.85%
Could Someone explain how to calculate the following?
• A project’s Time 0 cash flow
• The after-tax salvage cash flow
• The annual operating cash flows, OCF (how to do for say 1-5 years)
• Cash flow from assets, CFFA
• The appropriate discount rate for a project
• The NPV
• IRR
• Payback period