Project cash flow and NPV. The managers of Classic Autos
Incorporated plan to manufacture classic Thunderbirds (1957 replicas).
The necessary foundry equipment will cost a total of $4,000,000
and will be depreciated using a five-year MACRS life. Projected sales in
annual units for the next five years are 300 per year. If the sales price is
$27,000 per car, variable costs are $18,000 per car, and fixed costs are
$1,200,000 annually, what is the annual operating cash flow if the tax
rate is 30%? The equipment is sold for salvage for $500,000 at the end
of year five. What is the after-tax cash flow of the salvage? Net working
capital increases by $600,000 at the beginning of the project (year 0)
and is reduced back to its original level in the final year. What is the incremental
cash flow of the project? Using a discount rate of 12% for the
project, determine whether the project should be accepted or rejected
according to the NPV decision model.
