8 Year Cash Flow

8 Year Project Cash Flow

Elizabeth Ferguson

Financial Management (FINA310-1503A-03)

James Miller

August 17, 2015

Abstract

A manufacturing company is thinking of launching a new product. Within this essay are projected cash flows for eight years. The payback period is used to find out the amount of time it’ll take this company to recoup initial investment cost. The net value determines if the project is rejected or accepted.

8 Year Project Cash Flow

In this project a manufacturing company is thinking of launching a new project. The company expects to sell $950,000 of the new product in the 1st year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 45% of sales. Indirect incremental costs are estimated at $95,000 a year. The project requires a new plant that will cost a total of $1,500,000, which will be a depreciated straight line over the next 5 years. The new line will also require an additional net investment in inventory and receivables in the amount of $200,000. Assume there is no need for additional investment in building the land for the project. The firm’s marginal tax rate is 35%, and its cost of capital is 10%.

Calculations:

Depreciation:

Years Depreciable cost Rate Depreciation (Annual) Depreciation (accum) Bk. Value

1 $1,500,000 20% $300,000 $300,000 $1,200,000

2 $1,500,000 20% $300,000 $600,000 $900,000

3 $1,500,000 20% $300,000 $900,000 $600,000

4 $1,500,000 20% $300,000 $1,200,000 $300,000

5 $1,500,000 20% $300,000 $1,500,000 $0

Income Statement:

Years

1 2 3 4 5 6 7 8

Sales $950,000 $1,500, $1,500, $1,500, $1,500, $1,500, $1,500, $1,500,

Dir. Costs $427,500 $675, $675, $675, $675,...