I have a question about some calculations that I have done for the question below.

Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.

The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.

The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:

The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.

The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding.

There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.

The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.

Determine the initial outlay of the project.

Calculate the annual after-tax operating cash flow for Years 1 -5.

Determine the terminal year non-operating cash flow in year 5:

Taking into consideration all the information given, determine the Net Present Value of the project and advice the company on whether to invest in the new line of product.

What is the estimated Internal Rate of Return (IRR) of the project?

Should the project be accepted based on the IRR?

Based on the information above, I did some calculations for the questions asked but I am having some issues with the terminal year non-operating cash flow in year 5, Net Present Value, and the estimated Internal Rate of Return.

I've attached an image of what I have done so far
Transcribed Image Text:a Determine Initial Outay of the project Recovery Yea MARCS5-Years 20.00% Item Amount 32.00% 19.20% Price of Equipment Shipping/Installation $ 2,500,000.00 450,000.00 11.52% 11.52% Cash and Cash Equivalent 5.16% 100,000.00 30,000.00 250,000.00 50,000.00 330,000.00 3.280.000.00 Changes in Inventory NWC Account receivable Account Payable Tax Rate 25.00% Total: $ Initial Outlay b. Cak ulate the annual after-tax op era ting cash fow for year 1-5 Year 4 Total 2,950,000.00 $ 32.00% 944,000.00 | $ $ 2,950,000.00 | $ 2,950,000.00 $ 2,950,000.00$ 2,950,000.00 11.52% 339,840.00 $ 2,780,080.00 Annual Cost (De preciable Base) Depreciation Rate Depreciaton Dep rec iatio 20.00% 19.20% 11.52% 590,000.00 $ 566,400.00 $ 339,840.00 $ Year 4 Total 850,000.00 $ 5,300,000.00 375,000.00 | $ 1,551,000.00 5 850.000.00 Expected Annual Sales Less:Variable Cost Less: Fixed Cost (Overhead) Less: Depreciation Eamings Before Interest & Tax (EBIT) Tax @ 25% Profit Ater Tax 1,200,000.00 267,000.00 180,000.00 $ 1,200,000.00 267.000.00 | $ 180,000.00 | $ 566,400.00 | $ 1,200,000.00 $ 267,000.00 | $ $ 375,000.00 180,000.00 $ 900,000.00 339.840.00 | $ 2.780,080.00 180,000.00 180,000.00 590,000.00 944.000.00 339,840.00 $ 186.600.00 -$ 46,650.00 |-$ 139,950.00 -$ 706,350.00 | $ 191.000.00 | $ 163,000.00 40.750.00 122,250.00 |-$ 712,250.00 50.000.00 44,840.00 $ 11,210.00 | $ 33,630.00 $ 306,210.00 $ 2,831,770.00 44,840.00 11,210.00 68,920.00 17.230.00 47,750.00 $ 143,250.00 | $ 800,750.00 | $ 33,630.00 51,690.00 Add: Depreciation Less: Annual Loss of Profit 306,210.00 50,000.00 $ $ 50.000.00 50.000.00 50,000.00 256,2 10.00 250.000.00 Operating Cash Fbw 662,250.00 2$ 750,750.00 656,350.00 256,210.00 2,581,770.00 c. Determine the terminal year non-operating cash fbw in year 5 150,000 Year 2 4 Cash and Cash Equivalent Scrape Value Accounts Receivable Inventory Accounts Payable $ 100.000.00 200,000.00 250,000.00 30,000.00 50,000.00 350,000.00 $ Equpment Package Terminal Year Non-operaing K (Discount Rate) 7.69 Cash Fbw 2$ 880,000.00 K% 0.0769 d. Determine Net Present Value of Proect and Advice the company on whether to invest in the new product line (1+K) 1.0769 Annual Cash Year Сapital Packing Machine NWC (1=K)m Present Value Fbw 330,000.00 -$ 3,280,000.00 NPV = Cash Inflow Cash Outflow 2,950,000.00 3,280,000.00 Cash Inflow 3,232,337.73 1.0769 $ 1.15971361 $ 1.24889 5587 $ 1.34493 5657| $ 1.448361209 $ 1,253,975.86 1 662250.00 614,959.61 Cash Outflow 3,280,000.00 647,358.10 525,544.33 190,499.82 2 $ 750,750.00 NPV (47,662.27) 3 656,350.00 4 NPV < 0 Project should be rejec ted 256.210.00 5 880,000.00 | $ 350,000.00 $ 330,000.00 |$ 1,816,210.00 Total 3,232,337.73 K (Discount Rate) 7.207495 K% 0.0720749: (1+K) 1.07207495 Annual Cash Year Capital Packing Machine Annual Profit Loss NWC (1=K)n Present Value Fbw NPV = Cash Infbw - Cash Outfbw 2,950,000.00 330,000.00 $ 3,280,000.00 3,280,000.00 $ Cash Inflow 3,280,000.03 3,280,000.00 24 1.07207495 $ 1.149344698 $ 1.23218366 $ 1.320993236 $ 1.416203757 $ 1 $ 50,000.00 662,250.00 617,727.33 Cash Outflow $ 653,198.30 532,672.22 2 50,000.00 50,000.00 50,000.00 50,000.00 | $ $ 750,750.00 NPV 0.03 $ 656,350.00 4 $ 256,210.00 193,952.54 1.282.449.64 3.280.000.03 NPV = 0 Project should be rejected IRR = 7.21% 880,000.00 2$ 350,000.00 | $ 330,000.00 $ 1,816,210.00 Total IRR - Cost of Capital, Project should be rejected

Question

I have a question about some calculations that I have done for the question below.

Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.

The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.

The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:

The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.
The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding.
There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.

The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.

Determine the initial outlay of the project.
Calculate the annual after-tax operating cash flow for Years 1 -5.
Determine the terminal year non-operating cash flow in year 5:
Taking into consideration all the information given, determine the Net Present Value of the project and advice the company on whether to invest in the new line of product.
What is the estimated Internal Rate of Return (IRR) of the project?
Should the project be accepted based on the IRR?

Based on the information above, I did some calculations for the questions asked but I am having some issues with the terminal year non-operating cash flow in year 5, Net Present Value, and the estimated Internal Rate of Return.

I've attached an image of what I have done so far

a Determine Initial Outay of the project
Recovery Yea
MARCS5-Years
20.00%
Item
Amount
32.00%
19.20%
Price of Equipment
Shipping/Installation
$ 2,500,000.00
450,000.00
11.52%
11.52%
Cash and Cash Equivalent
5.16%
100,000.00
30,000.00
250,000.00
50,000.00
330,000.00
3.280.000.00
Changes in Inventory
NWC
Account receivable
Account Payable
Tax Rate
25.00%
Total: $
Initial Outlay
b. Cak ulate the annual after-tax op era ting cash fow for year 1-5
Year
4
Total
2,950,000.00 $
32.00%
944,000.00 | $
$ 2,950,000.00 | $
2,950,000.00 $ 2,950,000.00$
2,950,000.00
11.52%
339,840.00 $ 2,780,080.00
Annual
Cost (De preciable Base)
Depreciation Rate
Depreciaton
Dep rec iatio
20.00%
19.20%
11.52%
590,000.00 $
566,400.00 $
339,840.00 $
Year
4
Total
850,000.00 $ 5,300,000.00
375,000.00 | $ 1,551,000.00
5
850.000.00
Expected Annual Sales
Less:Variable Cost
Less: Fixed Cost (Overhead)
Less: Depreciation
Eamings Before Interest & Tax
(EBIT)
Tax @ 25%
Profit Ater Tax
1,200,000.00
267,000.00
180,000.00 $
1,200,000.00
267.000.00 | $
180,000.00 | $
566,400.00 | $
1,200,000.00
$
267,000.00 | $
$
375,000.00
180,000.00 $
900,000.00
339.840.00 | $ 2.780,080.00
180,000.00
180,000.00
590,000.00
944.000.00
339,840.00 $
186.600.00 -$
46,650.00 |-$
139,950.00 -$
706,350.00 | $
191.000.00 | $
163,000.00
40.750.00
122,250.00 |-$
712,250.00
50.000.00
44,840.00 $
11,210.00 | $
33,630.00 $
306,210.00 $ 2,831,770.00
44,840.00
11,210.00
68,920.00
17.230.00
47,750.00 $
143,250.00 | $
800,750.00 | $
33,630.00
51,690.00
Add: Depreciation
Less: Annual Loss of Profit
306,210.00
50,000.00 $
$
50.000.00
50.000.00
50,000.00
256,2 10.00
250.000.00
Operating Cash Fbw
662,250.00
2$
750,750.00
656,350.00
256,210.00
2,581,770.00
c. Determine the terminal year non-operating cash fbw in year 5
150,000
Year
2
4
Cash and Cash Equivalent
Scrape Value
Accounts Receivable
Inventory
Accounts Payable
$
100.000.00
200,000.00
250,000.00
30,000.00
50,000.00
350,000.00
$
Equpment Package
Terminal Year Non-operaing
K (Discount Rate)
7.69
Cash Fbw
2$
880,000.00
K%
0.0769
d. Determine Net Present Value of Proect and Advice the company on whether to invest in the new product line
(1+K)
1.0769
Annual Cash
Year
Сapital
Packing Machine
NWC
(1=K)m
Present Value
Fbw
330,000.00 -$ 3,280,000.00
NPV = Cash Inflow Cash Outflow
2,950,000.00
3,280,000.00
Cash Inflow
3,232,337.73
1.0769 $
1.15971361 $
1.24889 5587 $
1.34493 5657| $
1.448361209 $ 1,253,975.86
1
662250.00
614,959.61
Cash Outflow
3,280,000.00
647,358.10
525,544.33
190,499.82
2
$
750,750.00
NPV
(47,662.27)
3
656,350.00
4
NPV < 0 Project should be rejec ted
256.210.00
5
880,000.00 | $
350,000.00 $
330,000.00 |$
1,816,210.00
Total
3,232,337.73
K (Discount Rate)
7.207495
K%
0.0720749:
(1+K)
1.07207495
Annual Cash
Year
Capital
Packing Machine
Annual Profit Loss
NWC
(1=K)n
Present Value
Fbw
NPV = Cash Infbw - Cash Outfbw
2,950,000.00
330,000.00 $
3,280,000.00
3,280,000.00
$
Cash Inflow
3,280,000.03
3,280,000.00
24
1.07207495 $
1.149344698 $
1.23218366 $
1.320993236 $
1.416203757 $
1
$
50,000.00
662,250.00
617,727.33
Cash Outflow
$
653,198.30
532,672.22
2
50,000.00
50,000.00
50,000.00
50,000.00 | $
$
750,750.00
NPV
0.03
$
656,350.00
4
$
256,210.00
193,952.54
1.282.449.64
3.280.000.03
NPV = 0 Project should be rejected
IRR = 7.21%
880,000.00
2$
350,000.00 | $
330,000.00 $ 1,816,210.00
Total
IRR - Cost of Capital, Project should be rejected

Accepted Answer

Calculating Initial Investment,Working capital Requirement,operating cashflow,NPV & IRR