Heffron Technologies (HT) is considering the introduction of a new product. The code name of the new product is COSA. This new product will require the installation of new plant, which is estimated to cost $500,000. The company is to install the new plant in a factory site that the company acquired one year ago for $600,000, prices have increased dramatically in the area, increasing by 20% over the year. The factory was acquired before the new product was considered and was thought to be a good buy. The factory has been empty for the past year. In addition to the cost of plant, HT will require $300,000 in net working capital to start. The additional net working capital will be recovered in full at the end of the project’s life. HT estimates that sales revenue for the new product will be $700,000 a year for the five-year life of the product. The cash operating costs are expected to be $360,000 a year and include cost of goods sold. HT will use the straight-line method to depreciate all plant over a five-year life. In five years, this plant can be sold for about 10% of its installation cost. The company tax rate is 30% and has a required return on this project is 15 percent. Factory prices are not expected to increase over the life of the project. (1) Calculate the project’s initial time 0 cash flow, taking into account all side effects. (2) What is the aftertax salvage value of this plant?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1jM

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Heffron Technologies (HT) is considering the introduction of a new product. The code name of the new product is COSA. This new product will require the installation of new plant, which is estimated to cost $500,000. The company is to install the new plant in a factory site that the company acquired one year ago for $600,000, prices have increased dramatically in the area, increasing by 20% over the year. The factory was acquired before the new product was considered and was thought to be a good buy. The factory has been empty for the past year. In addition to the cost of plant, HT will require $300,000 in net working capital to start. The additional net working capital will be recovered in full at the end of the project’s life. HT estimates that sales revenue for the new product will be $700,000 a year for the five-year life of the product. The cash operating costs are expected to be $360,000 a year and include cost of goods sold. HT will use the straight-line method to depreciate all plant over a five-year life. In five years, this plant can be sold for about 10% of its installation cost. The company tax rate is 30% and has a required return on this project is 15 percent. Factory prices are not expected to increase over the life of the project. (1) Calculate the project’s initial time 0 cash flow, taking into account all side effects. (2) What is the aftertax salvage value of this plant?

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