Calculate the after-tax operating cash flows, Econometrics

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Your firm will produce widgets for the next 10 years (starting at t=1). Annual revenue from

selling widgets is $20,000. Production requires an initial outlay (at t=0) for machinery of $50,000, and

involves annual expenses for labor and raw materials of $3,000. In addition, the operation requires the firmto hold a certain amount of inventory. It is estimated that the level of inventory required is 10% of annualsales. You will need to build up this level of inventory before you start the project (i.e., at t=0). Themachinery will last 10 years and have zero salvage value. Any remaining assets of the firm will be

liquidated at the end of the ten years. Assume that the firm uses straight-line depreciation over the life ofthe equipment, pays 40% tax, and that all cash flows occur at the end of the year.

a) Calculate the after-tax operating cash flows for this firm

b) With an 8% WACC, what is the NPV of the project? Should you undertake it?

 


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