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You are required to: 1. Compute the initial cash flow for the project- 2. Compute the earnings before taxes for years 1 through 8 3. Compute the earnings after taxes for years 1 through 8 4. Compute the OCF for years 1 through 8

You are required to: 1. Compute the initial cash flow for the project- 2. Compute the earnings before taxes for years 1 through 8 3. Compute the earnings after taxes for years 1 through 8 4. Compute the OCF for years 1 through 8

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Please answer question 7.

Do not use any Tables to solve the answer. 

please break it down with formulas and show the working without using Excel.

Ocean Tide Industries is planning to introduce a new product with a projected life of eight years. The project is in the government's preferred industry list and qualifies for a one-time subsidy of $2,000,000 at the start of the project. Initial equipment (IE) will cost $14,000,000 and an additional equipment (AE) costing $1,000,000 will be needed at the end of year 2. At the end of 8 years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for its book value of $100,000. A working capital of $1,500,000 will be needed. The sales volume over the eight-year period have been forecast as follows: Year 1 80,000 units Year 2 120,000 units Years 3-5 300,000 units Years 6-8 200,000 units A sale price of $100 per unit is expected and the variable expenses will amount to 40% of sales revenue. Fixed cash operating expenses will amount to $1,600,000 per year. Additionally, an extensive advertising campaign will be launched, which will need annual expenses as follows: Year 1 $3,000,000 Year 2 $1,500,000 Years 3-5 $1,000,000 Years 6-8 $400,000 The company falls in the 50% tax category and believes 12% to be an appropriate estimate for its after-tax cost of capital for a project of this nature. All equipment is depreciated on a straight- line basis. In the event of a negative taxable income, the tax is computed as usual and is reported as a negative number, indicating a reduction in loss after tax. You are required to: 1. Compute the initial cash flow for the project 2. Compute the earnings before taxes for years 1 through 8 3. Compute the earnings after taxes for years 1 through 8 4. Compute the OCF for years 1 through 8 5. Compute the Terminal cash flow 6. Compute the FCF for years 1 through 8 7. Compute the NPV and IRR 8. Should the project be accepted?
Transcribed Image Text:Ocean Tide Industries is planning to introduce a new product with a projected life of eight years. The project is in the government's preferred industry list and qualifies for a one-time subsidy of $2,000,000 at the start of the project. Initial equipment (IE) will cost $14,000,000 and an additional equipment (AE) costing $1,000,000 will be needed at the end of year 2. At the end of 8 years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for its book value of $100,000. A working capital of $1,500,000 will be needed. The sales volume over the eight-year period have been forecast as follows: Year 1 80,000 units Year 2 120,000 units Years 3-5 300,000 units Years 6-8 200,000 units A sale price of $100 per unit is expected and the variable expenses will amount to 40% of sales revenue. Fixed cash operating expenses will amount to $1,600,000 per year. Additionally, an extensive advertising campaign will be launched, which will need annual expenses as follows: Year 1 $3,000,000 Year 2 $1,500,000 Years 3-5 $1,000,000 Years 6-8 $400,000 The company falls in the 50% tax category and believes 12% to be an appropriate estimate for its after-tax cost of capital for a project of this nature. All equipment is depreciated on a straight- line basis. In the event of a negative taxable income, the tax is computed as usual and is reported as a negative number, indicating a reduction in loss after tax. You are required to: 1. Compute the initial cash flow for the project 2. Compute the earnings before taxes for years 1 through 8 3. Compute the earnings after taxes for years 1 through 8 4. Compute the OCF for years 1 through 8 5. Compute the Terminal cash flow 6. Compute the FCF for years 1 through 8 7. Compute the NPV and IRR 8. Should the project be accepted?
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