Unit 4 indiviual project - Essay Example

Individual Project No. 4 Section Teacher August, 2006 Individual Project No. 4 To be able to sustain its operations, there is a need for Superior Manufacturing to forecast its financial statements that will summarize the operating, financing, and investment activities of the company.Given:Forecast 1st year sale - $950,000Forecast succeeding sales - $1,500,000 each yearDirect Costs (including labor and materials) – 55% of sales Indirect costs (incremental per year) - $80,000 each yearNew Plant - $1,000,000 (depreciates over the next five years)Additional net investment in inventory and receivables - $200,000Assumption: no need for additional investment in building and land for the projectMarginal tax rate – 35%Capital cost – 10%Requirements:Statement of cash flows over an 8-year periodPayback periodNet present valueCost of goods sold Year 1 Year 2 to 8= 950,000 x 10% = 1,500,000 x 10%= 95,000 = 150,000Depreciation= 1,000,000 x .

05 (five years) = 50,000 per yearMarginal tax (35%) = EBT x 35% Year 1 Year 2 to 8= 725,000 x .35 = 1,420,000= 253,000 = 497,000Total Cash FlowYear 1 Year 2 to 8= 725,000 - 253,000 = 1,420,000 - 497,000= 472,000 = 923,000Present Value (PV) = Future Value / (1 + r)n [where r = discount or interest rate, n=no. of years]; Assuming appropriate discount rate for translating future values to present values is 10%PV for Year 1 PV for Year 5 = 573,110.38= 472,000 / (1 + .10) 1 PV for Year 6 = 521,009.

44= 429,090PV for Year 7 = 473,644.94PV for Year 2 PV for Year 8 = 430,586.31= 923,000 / (1 + .10) 2= 762,809.92PV for Year 3 = 923,000 / (1 + .10) 3= 693,463.56PV for Year 4 = 923,000 / (1 + .10) 4= 630,421.42Net Present Value (NPV)Discounted Cash Flows for Superior Manufacturing (in dollars)YearCash FlowDiscounted Cash Flow0(1,802,500)(1,802,500)1472,000429,0902923,000762,809.923923,000693,463.564923,000630,421.425923,000573,110.386923,000521,009.447923,000473,644.948923,000430,586.31NPV (sum of discounted CF)4,514,135.

97In this regard, the new product line can generate future cash flows that are worth $4,514,135.97 today. The initial cost of the product line is $1,802,500 today. Thus, the project is worth $4,514,135.97 but costs only $1,802,500 and therefore creates $2,711,635.97 of new wealth.Payback Period (in dollars)YearCash FlowAccumulated Cash Flow1472,000472,0002923,0001,395,0003923,0002,318,0004923,0003,241,0005923,0004,164,0006923,0005,087,0007923,0006,010,0008923,0006,933,000Where: Accumulated cash flow (ACF) = summation of cash flow from previous years; i.e. Year 3 = Year 1 ACF + Year 2 ACF.

Based on your answer for question 2, do you think the project should be accepted? Why? Assume Superior has a P/B (payback) policy of not accepting projects with life of over three years.  The project acceptable since the payback period is within the three year span. In other words, the project is feasible to do since the capital can be immediately returned within three years.If the project required additional investment in land and building, how would this affect your decision? Explain.  If there is an additional investment in land and building, the company should think twice whether or not to accept the project since capital may not be returned within a span of three years (given that the accumulated cash flow is only $2,318,000).