Create an Excel file computing the pertinent cash flows for this project. An Excel template is provided along with cells to be filled in.
You have been hired as a consultant for Wild Cat Manufacturing Inc. (WCM), manufacturers of ultra smart phone covers. The market for these types of advanced covers is growing quickly.
Two years ago, the company had hired a marketing firm to analyze the ultra smart phone cover market, at a cost of $300,000. An excerpt of the marketing report is as follows:
The industry will continue to grow readily over the next years. With the brand name recognition that WCM brings to bear, we feel that the company will be able to sell 150k, 200k, 225k, and 230k units each year for the next four years, respectively. Again, capitalizing on the name recognition of the WildCat branded ultra smart phone covers, we feel that a premium price of $25 can be charged for each cover. Because the future of ultra smart phone covers may taper rapidly after four years, we feel at the end of the four-year period, sales should be discontinued.
WCM believes that fixed costs for the project will be $600,000 per year, and variable costs are 16% of sales. The equipment necessary for production will cost $4.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $700,000.
Net working capital of $150,000 will be required immediately and will be recoverable at the end of the project. WCM has a 35 percent tax rate.
Calculate the company’s operating cash flow.
Equipment Book Value
Depr MACRS
Annual Depreciation
Unit Price
Unit Sales
Year
Income Statement
Revenue
VC
FC
Depreciation
EBIT
Taxes (35%)
Net Income
4,500,000
0
1
Operating Cash Flow
EBIT
Depreciation (Add)
Taxes
Operating Cash Flow
Net Working Capital
NWC Requirement
Total Change in NWC
Capital Spending
Initial Outlay
Aftertax Salvage
Capital Spending
3,000,150
33.33%
1,499,850
25
150,000
–
999,900
44.45%
2,000,250
2
333,450
14.81%
666,450
3
7.41%
333,450
4
3,750,000
600,000
600,000
1,499,850
1,050,150
367,553
682,598
–
–
–
1,050,150
1,499,850
(367,553)
2,182,448
–
–
–
–
–
–
–
–
–
–
–
–
Operating Cash Flow
Change in NWC
Capital Spending
–
2,182,448
–
–
–
–
Total Project Cash Flow
–
2,182,448
–
–
–
Cumulative Cash Flow
Discounted CF @ 12%
Discount rate
12%
2,182,448
1,948,614
Payback
NPV
IRR
PI
2,182,448
–
2,182,448
–
2,182,448
–
0.00%
–
5
–
–
–
2,182,448
–
Discount Rate
8.00%
Reinvestment Rate
0.08
0
-250
1
27
2
27
3
27
4
27
5
27
6
27
7
27
8
27
9
27
10
27
11
27
12
27
13
27
14
27
15
27
16
27
17
27
18
27
19
27
20
520
NPV
120.86
IRR
12.13%
MIRR
10.15%
Payback
9.26
Discounted PB
17.55
Payback
-250
-223
-196
-169
-142
-115
-88
-61
-34
-7
20
47
74
101
Million
(250.00)
25.00
23.15
21.43
19.85
18.38
17.01
15.75
14.59
13.51
12.51
11.58
10.72
9.93
9.19
8.51
7.88
7.30
6.76
6.26
111.57
120.86
Years
Years
Discount Rate
8.00%
Reinvestment Rate
0.08 Payback
0
-250
-250
1
27
-223
2
27
-196
3
27
-169
4
27
-142
5
27
-115
6
27
-88
7
27
-61
8
27
-34
9
27
-7
10
-5
-12
11
27
15
12
27
42
13
27
69
14
27
15
27
16
27
(250.00)
25.00
23.15
21.43
19.85
18.38
17.01
15.75
14.59
13.51
(2.32)
11.58
10.72
9.93
9.19
8.51
7.88
Discounted
Payback
NPV
(250.00)
(250.00)
(225.00)
25.00
(201.85)
23.15
(180.42)
21.43
(160.57)
19.85
(142.20)
18.38
(125.18)
17.01
(109.43)
15.75
(94.84)
14.59
(81.33)
13.51
(68.83)
12.51
(57.25)
11.58
(46.53)
10.72
(36.60)
9.93
(27.41)
9.19
(18.89)
8.51
(11.01)
7.88
(3.72)
7.30
3.04
6.76
9.30
6.26
111.57
370.86
(250.00)
120.86
1.48
Discounted
Payback
NPV
(250.00)
(250.00)
(225.00)
25.00
(201.85)
23.15
(180.42)
21.43
(160.57)
19.85
(142.20)
18.38
(125.18)
17.01
(109.43)
15.75
(94.84)
14.59
(81.33)
13.51
(83.65)
(2.32)
(72.07)
11.58
(61.35)
10.72
(51.42)
9.93
(42.23)
9.19
(33.72)
8.51
(25.84)
7.88
PV
Investment
NPV
PI
17
18
19
20
NPV
IRR
MIRR
PI
27
27
27
520
106.04
11.65%
9.91%
10
7.30
6.76
6.26
111.57
106.04
(18.54)
(11.78)
(5.53)
19.74
7.30
6.76
6.26
111.57
356.04
(250.00)
106.04
1.42
PV
Investment
NPV
PI
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