ABC, Inc is considering launching a new product which incurred $2.5 million in Research and Development expenses over the last year. The company will spend $1.8 million to acquire the equipment necessary for the manufacture of the new productThe equipment will last for 15 years and have a salvage value of $35,000. It will be depreciated to zero over 10 years using straight line depreciation. The company will also have an increase of $250,000 in accounts receivable and a decrease of $75,000 in accounts payable. The company anticipates to produce 100.000 units every year for the next 15 years and sell the units for $4 per unit The variable costs are $0.25 per unit and the annual fixed costs are projected to be $ 10,000 year. The company has a target capital structure of 40% debt and 60% equityThe company's outstanding bonds have a yield to maturity of 5.5% and the company's tax rate is 30%. The company has a beta of 1.4 , the risk free rate is 2% and the market risk 6% Answer the questions below and show all the formulae you used and all the calculations . 1) What is the project's cash flow at time 0? 2) what is the after tax operating cash flow in years 1 through 10? 3) what is the after tax operating cash flow in years 11 through 14? 4) what is the after tax cash flow in year 15? 5)what is the company’s cost of equity? 6) what is the company’s WACC? 7) what is the NPV of the project? 8) what is the IRR of the project? 9) what is the profitability index? 10) should the company launch the new project?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
ABC, Inc is considering launching a new product which incurred $2.5 million in Research and Development expenses over the last year. The company will spend $1.8 million to acquire the equipment necessary for the manufacture of the new productThe equipment will last for 15 years and have a salvage value of $35,000. It will be
1) What is the project's cash flow at time 0?
2) what is the after tax operating cash flow in years 1 through 10?
3) what is the after tax operating cash flow in years 11 through 14?
4) what is the after tax cash flow in year 15?
5)what is the company’s
6) what is the company’s WACC?
7) what is the
8) what is the
9) what is the profitability index?
10) should the company launch the new project?
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