Your company is investigating the opportunity to produce MP3 players. The equipment required for the project initially costs $1,800,000 and will be depreciated on a straight line to $400,000 (not to zero) over the 4 year life of the project. The project manager actually believes that the equipment could be salvaged for $200,000 at the end of the life of the project. The firm's marginal tax rate is 20% but the average tax rate is 27%. The marketing department and production operations department have estimated the following:
Forecast Sales per Year 120,000 units
Forecast Price per Unit $43
Forecast Variable Cost per Unit $29
Forecast Fixed Costs per Year $510,000
Part A: What is the after-tax salvage value of the equipment?
$400,000
$200,000
$261,000
$240,000
$219,000
Part B: What is the Operating Cash Flow (OCF) per year?
$496,000
$936,000
$40,000
$1,006,000
$1,516,000
Part C: Assume the company sells 140,001 units instead of 140,000. What is the marginal profit of selling that extra unit?
$14
$13
$43
$1,680,000
$29
Part D: The project requires the company to immediately increase inventory by $130,000, and accounts payable will also immediately increase by $90,000. All investments in net working capital will be reversed at the end of the life of the project. What is the initial investment in Net Working Capital?
$130,000
$40,000
$90,000
-$50,000
-$30,000