KP has spent $1000 on research and development (R&D) and FDA testing for Corzine.• The Corzine project will require building a new manufacturing plant. KP purchased a plot of land 5 yearsago for $500. The land was recently appraised at $1000. If KP rejects the Corzine project they will sellthe land since it will not be needed.• KP will spend $8000 to build the plant.• The new plant will be depreciated down to zero on a straight-line basis, over the project’s 5 year usefullife.• KP will need to increase Net Working Capital (NWC) by $1000 at time zero. NWC will then decrease by$200 each year of the project’s life, so that after year 5 the NWC is completely recovered.• The fixed assets associated with the project will have no salvage value. KP will need to spend $500 attime 5 to clean up hazardous waste from the plant. The $500 is a tax-deductible expense.• KP spent $500 on a marketing study that resulted in this sales forecast for the quantity sold each year:Year Units sold (Q)1 8002 9003 11004 10005 950 Year Units Sold (Q) 1 800 2 900 3 1100 4 1000 5 950 • Corzine will sell for $10/unit, with variable costs of 50% of sales.• Fixed costs associated with the Corzine project will be $1500 per year.• Adopting the Corzine project will cause sales of KP’s existing drug Wellmax to fall by 200 units per year.Wellmax sells for $8/unit with variable costs of 40% of sales.• Recall that KP’s tax rate is 24%. a) What is the initial (time zero) cash flow associated with the project? Include all incremental cash flows.b) What is the annual operating cash flow (OCF) for each year of the Corzine project? (Note: compute only annualOCF here. Do not include NWC effects or time 5 clean-up costs) c) Set up a table which details all the incremental cash flows (OCF, net capital spending, net working capital,clean-up costs, etc.) to the Corzine project for each of years 0 through 5. Add up the cash flows for each year toget a time line of the total cash flows to the project at each date on the time line.
KP has spent $1000 on research and development (R&D) and FDA testing for Corzine.
• The Corzine project will require building a new manufacturing plant. KP purchased a plot of land 5 years
ago for $500. The land was recently appraised at $1000. If KP rejects the Corzine project they will sell
the land since it will not be needed.
• KP will spend $8000 to build the plant.
• The new plant will be
life.
• KP will need to increase Net Working Capital (NWC) by $1000 at time zero. NWC will then decrease by
$200 each year of the project’s life, so that after year 5 the NWC is completely recovered.
• The fixed assets associated with the project will have no salvage value. KP will need to spend $500 at
time 5 to clean up hazardous waste from the plant. The $500 is a tax-deductible expense.
• KP spent $500 on a marketing study that resulted in this sales
Year Units sold (Q)
1 800
2 900
3 1100
4 1000
5 950
| Year | Units Sold (Q) |
| 1 | 800 |
| 2 | 900 |
| 3 | 1100 |
| 4 | 1000 |
| 5 | 950 |
• Corzine will sell for $10/unit, with variable costs of 50% of sales.
• Fixed costs associated with the Corzine project will be $1500 per year.
• Adopting the Corzine project will cause sales of KP’s existing drug Wellmax to fall by 200 units per year.
Wellmax sells for $8/unit with variable costs of 40% of sales.
• Recall that KP’s tax rate is 24%.
a) What is the initial (time zero) cash flow associated with the project? Include all incremental cash flows.
b) What is the annual operating cash flow (OCF) for each year of the Corzine project? (Note: compute only annual
OCF here. Do not include NWC effects or time 5 clean-up costs)
c) Set up a table which details all the incremental cash flows (OCF, net capital spending, net working capital,
clean-up costs, etc.) to the Corzine project for each of years 0 through 5. Add up the cash flows for each year to
get a time line of the total cash flows to the project at each date on the time line.
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