A manufacturing plant can be purchased for $180,000. An additional
$20,000 must be invested in working capital for raw material and spare
parts inventory and accounts receivable money tied up in operating
costs. The $180,000 plant costs will be depreciated straight line over 7
years using the half-year depreciation convention in year 1. Actual
salvage value is estimated to be $170,000 for used machinery and
equipment and working capital return at year 15. Annual sales revenue is
estimated to be $100,000 in year 1 with operating costs of $40,000. In
years 2 to 15, escalation of operating costs and sales revenue are
projected to be washout. The effective income tax rate is 40%. The
minimum ROR is 15% after taxes. Calculate the project DCFROR. Financial
situation is stand alone.
$20,000 must be invested in working capital for raw material and spare
parts inventory and accounts receivable money tied up in operating
costs. The $180,000 plant costs will be depreciated straight line over 7
years using the half-year depreciation convention in year 1. Actual
salvage value is estimated to be $170,000 for used machinery and
equipment and working capital return at year 15. Annual sales revenue is
estimated to be $100,000 in year 1 with operating costs of $40,000. In
years 2 to 15, escalation of operating costs and sales revenue are
projected to be washout. The effective income tax rate is 40%. The
minimum ROR is 15% after taxes. Calculate the project DCFROR. Financial
situation is stand alone.
