Answered: at the beginning of the project (year…

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 4E: Determine cash flows Natural Foods Inc. is planning to invest in new manufacturing equipment to make...

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Question

Project cash flow and NPV. The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds (1957 replicas). The necessary foundry equipment will cost a total of

$3,900,000

and will be depreciated using a five-year MACRS life,

he sales manager has an estimate for the sale of the classic Thunderbirds. The annual sales volume will be as follows:

Year one: 230		Year four: 370
Year two: 280		Year five: 330
Year three: 350

If the sales price is

$28,000

per car, variable costs are

$17,000

per car, and fixed costs are

$1,400,000

annually, what is the annual operating cash flow if the tax rate is

30%?

The equipment is sold for salvage for

$500,000

at the end of year five. Net working capital increases by

$500,000

at the beginning of the project (year 0) and is reduced back to its original level in the final year. Find the internal rate of return for the project using the incremental cash flows.

What is the annual operating cash flow of the project for year 2?

(Round to the nearest dollar.)

MACRS Fixed Annual Expense Percentages by Recovery Class

Year	3-Year	5-Year	7-Year	10-Year
1	33.33%	20.00%	14.29%	10.00%
2	44.45%	32.00%	24.49%	18.00%
3	14.81%	19.20%	17.49%	14.40%
4	7.41%	11.52%	12.49%	11.52%
5		11.52%	8.93%	9.22%
6		5.76%	8.93%	7.37%
7			8.93%	6.55%
8			4.45%	6.55%
9				6.55%
10				6.55%
11				3.28%

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