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 uni 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 2014 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:
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 uni 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 2014 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:
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Transcribed Image Text:Fin 30
atem
Assignment due on Friday 2005
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
2014 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:
Note: Create tables to do this problem:
1. What is the total equipment cost at the start?
2. What is the depreciation amount for each year?
Create a depreciation schedule on a table
3. Calculate the Net Income for years
4. Calculate the Operating Cash Flow for each year
2012
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