Bartlet Industries is considering a new product line and will need to replace older equipment with new equipment in order to manufacture the product. The new machine will cost $250,000 with an installation cost of $25,000, and will be depreciated using the five year MACRS depreciation schedule in the table in question 4. Bartlet also spent $25,000 for a market analysis to measure demand for the new product. The old machine is four years old, had an original depreciable base of $150,000 and is being depreciated using the same five year MACRS depreciation schedule. The machine is expected to be sold for $30,000. An investment in working capital totaled $20,000. Revenues are expected to be $250,000 in the first year, and grow by 5% each year of the project’s four year life. Fixed expenses are expected to be $45,000 per year and variable expenses will begin year 1 at $35,000 and grow with sales at 5% each year. The project is expected to last four years. After the fourth year, the machinery will be sold for $45,000. Working capital will be liquidated for $20,000. The firm has a 21% tax rate and a WACC of 9%. Calculate the total investment for the project. Calculate the annual cash flows for the life of the project. Calculate the terminal value of the project. Calculate the NPV of the project with a recommendation as to whether Bartlet should proceed or not MACRS Table Recovery Year 5 Years 7 Years 10 Years 1 20% 14% 10% 2 32% 25% 18% 3 19% 18% 14% 4 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 9 6% 10 6% 11 4% Totals 100% 100% 100%
Bartlet Industries is considering a new product line and will need to replace older equipment with new equipment in order to manufacture the product. The new machine will cost $250,000 with an installation cost of $25,000, and will be
old, had an original depreciable base of $150,000 and is being depreciated using the same five year MACRS depreciation schedule. The machine is expected to be sold for $30,000. An investment in working capital totaled $20,000.
Revenues are expected to be $250,000 in the first year, and grow by 5% each year of the project’s four year life. Fixed expenses are expected to be $45,000 per year and variable expenses will begin year 1 at $35,000 and grow with sales at 5% each year.
The project is expected to last four years. After the fourth year, the machinery will be sold for $45,000. Working capital will be liquidated for $20,000.
The firm has a 21% tax rate and a WACC of 9%.
Calculate the total investment for the project.
Calculate the annual cash flows for the life of the project.
Calculate the terminal value of the project.
Calculate the
MACRS Table
| Recovery Year | 5 Years | 7 Years | 10 Years |
| 1 | 20% | 14% | 10% |
| 2 | 32% | 25% | 18% |
| 3 | 19% | 18% | 14% |
| 4 | 12% | 12% | 12% |
| 5 | 12% | 9% | 9% |
| 6 | 5% | 9% | 8% |
| 7 | 9% | 7% | |
| 8 | 4% | 6% | |
| 9 | 6% | ||
| 10 | 6% | ||
| 11 | 4% | ||
| Totals | 100% | 100% | 100% |
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