Using the simplified straight-line method down to zero

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Cash Flow Estimation:

Example 1:

You are considering expanding your product line. You feel you can sell 100,000 of these products per year for 4 years (after which time this project is expected to shut down). The product will sell for $6 each, with variable costs of $3 for each one produced, while annual fixed costs associated with production will be $90,000. In addition, there will be a $200,000 initial expenditure associated with the purchase of new production equipment. It assumed that this initial expenditure will be depreciated using the simplified straight-line method down to zero over 4 years. This project will also require a one-time initial investment of $30,000 in net working capital associated with inventory. Finally, assume that the firm’s marginal tax rate is 34 percent.

Example 2:

Firm ABC is considering to invest in a project to reduce costs by $70,000 annually. The equipment costs $200,000, had a 4-year life (will be depreciated as a 3-year MACRS asset), requires no additional investment in net working capital, and has a salvage value of $50,000. The firm’s tax rate is 39% and the required return on investments in this risk class is 10%. What is the NPV and IRR of this project? (The MACRS’s first three years’ depreciation rates in order are: 33.33%, 44.44% and 14.82%.)

Please provide all work for these problems, not just final solution so they can be modeled for similar problems, 

Reference no: EM132059284

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