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MMCC is investigating the feasibility of a new line of power mulching tools aimed at th
growing number of home composters. Based on exploratory conversations with buyers
large garden shops, MMCC projects unit sales as follows:
The new power mulcher will sell for $120 per unit to start with. When the competition
up after three years however MMCC anticipates that the price will drop to $110.
The Power Mulcher project requires $20,000 in net working capital at the start .Subseq
total net working capital at the end of each year will be about 15% of sales for that yea
variable cost per unit is $60 and total fixed costs are $25,000 per year.
It will cost $800,000 to buy the equipment necessary to begin production. This investm
primarily in industrial equipment, which qualifies as seven year MACRS property .The
equipment will be worth about 20 per cent of its costs in eight years. The relevant tax r
per cent and the required return is 15 per cent. Based on this information should MMC
proceed
?
Additional Data : Property Class for Modified Accelerated Cost Recovery System (MACRS)
Table :1
PROJECTED REVENUES -POWER MULCHER PROJECT
YEAR
1 2 3
UNIT PRICE 120 120 120
UNIT SALES 3000 5000 6000
REVENUES 360000 600000 720000
VARIABLE COST 180000 300000 360000
FIXED COST 25000 25000 25000
DEPRECIATION 114320 195920 139920
EBIT 40680 79080 195080
TAXES(34%) 13831.2 26887.2 66327.2
NET INCOME 26848.8 52192.8 128752.8
YEAR
0
1.OPERATING CASH FLOW
EBIT
DEPRECIATION
TAXES
OPERATING CASH FLOW
3. CAPITAL SPENDING
INITIAL OUTLAY -800000
AFTER TAX SALVAGE VALUE
TOTAL CAPITAL SPENDING -800000
ATSV=SV-TAXES PAID
SV=0.20*800000=160,000
System (MACRS)
4 5 6 7 8
110 110 110 110 110
6500 6000 5000 4000 3000
715000 660000 550000 440000 330000
390000 360000 300000 240000 180000
25000 25000 25000 25000 25000
99920 71440 71360 71440 35680
200080 203560 153640 103560 89320
68027.2 69210.4 52237.6 35210.4 30368.8
132052.8 134349.6 101402.4 68349.6 58951.2
MULCHER PROJECT
54000-20000
1 2 3 4 5 6 7 8
105600
105600
TSV=SV-TAXES PAID
V=0.20*800000=160,000
(160000-0)*0.34
54400
TSV=160000-54400
105600
NPV $65,484.83
IRR 17.24%
PAYBACK 4.08 YEARS
820000 CF RECOVERY
1 107168.8 712831.2
2 212113 500718.2
3 250673 250045.2
4 232723 17322.2
5 214040 0.08093