IBM is considering a new expansion project and the finance staff has received information summarized below. The project require IBM to purchase $900,000 of equipment in 2013 (t=0). Inventory will increase by $175,000 and accounts payable will rise by $75,000. The project will last for four years. The company forecasts that they will sell 2,000,000 units in 2014, 2,500,000 units in 2015, 2,500,000 units in 2016, and 2,400,000 units in 2017. Each unit will sell for $2 in 2014, $3 in 2015, $2.5 in 2016 and $2 in 2017. The fixed cost of producing the product is $2 million each year. The variable cost of producing each unit will rise from $1.05, 1.03, 1.4 and $1.05 from 2013 to 2017 respectively. The equipment will be depreciated under the MACRS system using the applicable rates of 33%, 45%, 15%, and 7% respectively When the project is completed in 2017 (t=4), the company expects that it will be able to salvage the equipment for $100,000, and it expects that it will fully recover the NWC. The estimated tax rate is 40%. Based on the perceived risk, the project’s WACC is estimated to be 10%. Your main task is to and evaluate the cash flows, analyze the results, and present your recommendations. To help in the analysis, answer all the following questions: What is the total equipment cost at the start? What is the depreciation amount for each year? Calculate the Net Income for each year Calculate the Operating Cash Flow for each year
IBM is considering a new expansion project and the finance staff has received information summarized below. The project require IBM to purchase $900,000 of equipment in 2013 (t=0). Inventory will increase by $175,000 and accounts payable will rise by $75,000. The project will last for four years. The company forecasts that they will sell 2,000,000 units in 2014, 2,500,000 units in 2015, 2,500,000 units in 2016, and 2,400,000 units in 2017. Each unit will sell for $2 in 2014, $3 in 2015, $2.5 in 2016 and $2 in 2017. The fixed cost of producing the product is $2 million each year. The variable cost of producing each unit will rise from $1.05, 1.03, 1.4 and $1.05 from 2013 to 2017 respectively. The equipment will be depreciated under the MACRS system using the applicable rates of 33%, 45%, 15%, and 7% respectively When the project is completed in 2017 (t=4), the company expects that it will be able to salvage the equipment for $100,000, and it expects that it will fully recover the NWC. The estimated tax rate is 40%. Based on the perceived risk, the project’s WACC is estimated to be 10%. Your main task is to and evaluate the cash flows, analyze the results, and present your recommendations. To help in the analysis, answer all the following questions: What is the total equipment cost at the start? What is the depreciation amount for each year? Calculate the Net Income for each year Calculate the Operating Cash Flow for each year
Chapter14: Capital Structure Management In Practice
Section14.A: Breakeven Analysis
Problem 8P
Related questions
Question
IBM is considering a new expansion project and the finance staff has received information summarized below.
- The project require IBM to purchase $900,000 of equipment in 2013 (t=0).
- Inventory will increase by $175,000 and accounts payable will rise by $75,000.
- The project will last for four years. The company
forecasts that they will sell 2,000,000 units in 2014, 2,500,000 units in 2015, 2,500,000 units in 2016, and 2,400,000 units in 2017. - Each unit will sell for $2 in 2014, $3 in 2015, $2.5 in 2016 and $2 in 2017.
- The fixed cost of producing the product is $2 million each year.
- The variable cost of producing each unit will rise from $1.05, 1.03, 1.4 and $1.05 from 2013 to 2017 respectively.
- The equipment will be
depreciated under the MACRS system using the applicable rates of 33%, 45%, 15%, and 7% respectively - When the project is completed in 2017 (t=4), the company expects that it will be able to salvage the equipment for $100,000, and it expects that it will fully recover the NWC.
- The estimated tax rate is 40%.
- Based on the perceived risk, the project’s WACC is estimated to be 10%.
Your main task is to and evaluate the cash flows, analyze the results, and present your recommendations. To help in the analysis, answer all the following questions:
- What is the total equipment cost at the start?
- What is the depreciation amount for each year?
- Calculate the Net Income for each year
- Calculate the Operating Cash Flow for each year
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College