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A firm is considering expanding its line of soft drink production as a result of increased market share. The new production line will cost $350,000.

A firm is considering expanding its line of soft drink production as a result of increased market share. The new production line will cost $350,000. The new line will be depreciated over its 7 year life using straight line depreciation (assume no salvage value for this calculation). Revenues are expected to increase $150,000 the first year and increase at a rate of $15,000 a year each year thereafter. Operating costs are expected to jump $60,000 in the first year and increase at a rate of $6000 per year each year thereafter. After seven years it is estimated that that machine will have a salvage value of $35,000. Net working capital is expected to increase by $60,000. The firm has a tax rate of 40%.

What is the net initial investment, the annual cash flows from the project and the terminal value?

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solution.xls

1. Calulation for Initial Out Flow: Cost of the new product line
Add:Working Capital
Initial Out Flow
2. Calculation for the Cash Flows
Particulars
Revenues
Less:Operating Cost
Profit before...

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