You are an economic and financial advisor of company Express S. A. This company asks you to construct a cash flow and determine financial indicators necessary to make a decision on a business idea and thus to know whether an investment project is profitable. Following steps are suggested: Step 1. Carefully read following background information: Investment project needs $356,000 in machinery and $40,000 in working capital. Investor has equity capital, which is currently invested with a return of 12% per annum, and also has possibility of obtaining credit. Machinery is estimated to have a useful life of 3 years with a scrap value of $12,000 and working capital is 40% recoverable, both at the end of last period. Direct manufacturing costs will be as follows: - Labour: $264,000 - Raw materials: $132,000 - Other costs: $28,000 - Patents: $14,000 Debt is payable at the end of each of three (3) years with annual interest payments and can be amortized annually in any amount desired. Law allows for depreciation over three (3) years, so assume that sales will be $600,000 per year. Cost of loan is 14% per year. Step 2. Assess economic desirability (pure project) of implementing this project. Step 3. Evaluate financed project, according to conditions formulated. Step 4. Repeat step 2 and 3, assuming now that you have to apply a profit tax rate of 35%. Step 5. Without further calculation, analyzes how NPV changes if an accelerated depreciation method is allowed. Step 6. Now consider all scenarios with and without tax and indicate which is best decision in each case. Step 7. In an Excel spreadsheet, work out two sheets, one for calculation of economic desirability (Step 2) and one for calculation of completed project (Step 3), with all background information given in Steps 1, 4 and 6.
You are an economic and financial advisor of company Express S. A. This company asks you to construct a cash flow and determine financial indicators necessary to make a decision on a business idea and thus to know whether an investment project is profitable.
- Following steps are suggested:
Step 1. Carefully read following background information:
Investment project needs $356,000 in machinery and $40,000 in working capital. Investor has equity capital, which is currently invested with a return of 12% per annum, and also has possibility of obtaining credit. Machinery is estimated to have a useful life of 3 years with a scrap value of $12,000 and working capital is 40% recoverable, both at the end of last period.
Direct
- Labour: $264,000
- Raw materials: $132,000
- Other costs: $28,000
- Patents: $14,000
Debt is payable at the end of each of three (3) years with annual interest payments and can be amortized annually in any amount desired. Law allows for
Step 2. Assess economic desirability (pure project) of implementing this project.
Step 3. Evaluate financed project, according to conditions formulated.
Step 4. Repeat step 2 and 3, assuming now that you have to apply a profit tax rate of 35%.
Step 5. Without further calculation, analyzes how
Step 6. Now consider all scenarios with and without tax and indicate which is best decision in each case.
Step 7. In an Excel spreadsheet, work out two sheets, one for calculation of economic desirability (Step 2) and one for calculation of completed project (Step 3), with all background information given in Steps 1, 4 and 6.
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