Problem 1: A company is considering a three-year project that requires an initial fixed asset investment of $1,800,000. The project will be depreciated straight-line to zero over its three year life. The salvage value is negligible. The annual sales and operating expenses are projected to be $1,500,000 and $800,000, respectively. The marginal tax rate for the company is 35%, what is the OCF for this project?
Problem 2: Muncie Manufacturing is considering increasing its collection period by 25 days in hopes of attracting additional sales. Muncie currently has annual sales of $500,000. They expect revenues to increase $25,000 per year and expenses to increase by $10,000 per year. Muncie believes that an additional $3,000 will go uncollected each year as a result of this change in policy. This $3,000 loss will have to be replaced each year to keep the account receivable balance at the increased 25-day level. They project that they will be able to collect 90% of the outstanding balance at the end of year 4 (after replacement). Using a 4-year life, 40% tax rate, and 10% required return, is the investment attractive?