Suppose I would like to buy a new oven for my bakery so that I can make pretzels. Based on my expertize, I estimate that each year I can sell 50,000 pretzels at $4.00 each. It will cost me $2.50 to make them. Fixed cost associated to making the pretzels are $12,000 per year. Additional net working capital of $20,000 is needed immediately. This amount does not change. The oven including delivery and installation costs are $90,000, which I can depreciate to $0 over 3 years, the oven can be used for 3 years. The oven that I was using can be sold at $500, I bought it for $1,200 a year ago. The current tax rate is 34%, and the required rate of return is 20%. What are my cash flows over the lifetime of the project?
Suppose I would like to buy a new oven for my bakery so that I can make pretzels. Based on my expertize, I estimate that each year I can sell 50,000 pretzels at $4.00 each. It will cost me $2.50 to make them. Fixed cost associated to making the pretzels are $12,000 per year. Additional net working capital of $20,000 is needed immediately. This amount does not change. The oven including delivery and installation costs are $90,000, which I can
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