Finance Question

Phone Home, Inc. is considering a new 6-year expansion project that requires an initial fixed asset investment of $5.876 million. The fixed asset will be depreciated straight-line to zero over its 6-year tax life, after which time it will be worthless. The project is estimated to generate $5,328,000 in annual sales, with costs of $2,131,200. The tax rate is 32 percent.

(1) What is the annual operating cash flow for this project?

 

(2) Suppose the company’s WACC is 10 percent. The expansion proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the project’s NPV .

 

(3) Suppose the project also requires an initial investment in net working capital of 300,000. At the end of the project, the salvage value of the net working capital would be $280,000 and the fixed assets will have a market value of $180,000. What is the project’s year 0 net cash flow? Year 1? Year 2? Year 3?