Use the following information to answer the next three questions.
Maple Media is considering a proposal for a new project.
In reviewing the proposal, the
company’s CFO is considering the following facts:
The new business will require the company to purchase additional fixed
assets that will cost $20,000,000 at t=0.
For tax and accounting purposes,
these costs will be depreciated on a straight line basis to a value of
$5,000,000 over the 5 year life of the project.
At the end of five years, the company will get out of the business and will
sell the fixed assets for $3,000,000.
The company spent $2,000,000 to conduct the research and development
on this project.
Because the R&D results were positive, the firm decided
to go ahead with the project.
The project will require a $8,000,000 increase in net working capital at
t=0, which will be recovered in the last (terminal) year of the project.
If the firm does not enter this business, then it will lease its facility for
$500,000 per year (before taxes), starting in year 1.
This expense will not
be impacted by inflation.
The firm will have a yearly interest expense of $1,000,000, starting in year
The tax rate is 40%
The new business is expected to generate $30 million in sales each year
starting in year 1, for 5 years.
The operating costs, excluding depreciation
are expected to be $25 million per year, starting in year 1.
expected to be 3% a year, and revenues and costs are expected to increase
at the inflation rate starting in the year 2 cash flows.
(Do not put inflation
into the year 1 cash flows.)
18. What are the initial cash flows for this project?
19. What are the year 1 cash flows for the project?