CASH FLOW Getting up and running will cost the company $900,000 for capital equipment; there was an additional $400,000 for development expenses. The equipment is expected to have a useful life of 5 years (what a coincidence). The expected sales volumes are: Year 1 500,000 Year 2 700,000 Year 3 900,000 Year 4 850,000 Year 5 450,000 Facts: Unit cost is $0.245 Profit margin is 65% on sell price Corporate income tax rate is 34% You will finance the entire $900,000 but you do have it in cash if required; the financing will be at 9% and only 1 payment per year (5 total payments) for simplicity. Is this a worthwhile program to invest in? What assumptions did you make? Are there any alternatives at the end of 5 years?

Question

CASH FLOW

Getting up and running will cost the company $900,000 for capital equipment; there was an additional $400,000 for development expenses. The equipment is expected to have a useful life of 5 years (what a coincidence). The expected sales volumes are:

 

Year 1 500,000

Year 2 700,000

Year 3 900,000

Year 4 850,000

Year 5 450,000

Facts:

Unit cost is $0.245

Profit margin is 65% on sell price

Corporate income tax rate is 34%

You will finance the entire $900,000 but you do have it in cash if required; the financing will be at 9% and only 1 payment per year (5 total payments) for simplicity.

Is this a worthwhile program to invest in?

What assumptions did you make?

Are there any alternatives at the end of 5 years?

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