Finance Question

Phone Home, Inc. is considering a new 6-year expansion project that requires an initial fixed asset investment of $5.876 million. The fixed asset will be depreciated straight-line to zero over its 6-year tax life, after which time it will be worthless. The project is estimated to generate $5,328,000 in annual sales, with costs of $2,131,200. The tax rate is 32 percent.

(1) What is the annual operating cash flow for this project?

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(2) Suppose the company’s WACC is 10 percent. The expansion proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the project’s NPV .

 

(3) Suppose the project also requires an initial investment in net working capital of 300,000. At the end of the project, the salvage value of the net working capital would be $280,000 and the fixed assets will have a market value of $180,000. What is the project’s year 0 net cash flow? Year 1? Year 2? Year 3?