Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features; The firm just spent $300,000 for a marketing study to determine consumer demand (@t-0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject to depreciation). • If the project is undertaken, at t = 0 the company will need to increase its inventories by $3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project's life (t = 10). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. At t= 10, the project is expected to cease being economically viable and the factory (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes). What is the total cash flow at t=10? Round to nearest whole dollar value.
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features; The firm just spent $300,000 for a marketing study to determine consumer demand (@t-0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject to depreciation). • If the project is undertaken, at t = 0 the company will need to increase its inventories by $3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project's life (t = 10). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. At t= 10, the project is expected to cease being economically viable and the factory (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes). What is the total cash flow at t=10? Round to nearest whole dollar value.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 17P: The Yoran Yacht Company (YYC), a prominent sailboat builder in Newport, may design a new 30-foot...
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Transcribed Image Text:Question 4
Aero Motorcycles is considering opening a new manufacturing facility in Fort
Worth to meet the demand for a new line of solar-charged motorcycles (who wants
to ride on a cloudy day anyway?) The proposed project has the following features;
• The firm just spent $300,000 for a marketing study to determine consumer
demand (@t=0).
• Aero Motorcycles purchased the land the factory will be built on 5 years ago for
$2,000,000 and owns it outright (that is, it does not have a mortgage). The land has
a current market value of $2,600,000.
• The project has an initial cost of $20,000,000 (excluding land, hint: the land is not
subject to depreciation).
• If the project is undertaken, at t = 0 the company will need to increase its
inventories by $3,500,000, accounts receivable by $1,500,000, and its accounts
payable by $2,000,000. This net operating working capital will be recovered at the
end of the project's life (t = 10).
• If the project is undertaken, the company will realize an additional $8,000,000 in
sales over each of the next ten years. (i.e. sales in each year are $8,000,000)
• The company's operating cost (not including depreciation) will equal 50% of sales.
• The company's tax rate is 35 percent.
• Use a 10-year straight-line depreciation schedule.
. At t = 10, the project is expected to cease being economically viable and the
factory (including land) will be sold for $4,500,000 (assume land has a book value
equal to the original purchase price).
The project's WACC = 10 percent
• Assume the firm is profitable and able to use any tax credits (i.e. negative taxes).
What is the total cash flow at t=10? Round to nearest whole dollar value.
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