Layla's Distribution Co. is considering a project which willrequire the purchase of $1.6 million in new equipment. Theequipment will be depreciated straight-line to a zero book valueover the 5-year life of the project. Layla's expects to sell theequipment at the end of the project for $180,000. Annual sales fromthis project are estimated at $1.3 million, and you will incur$100,000 in fixed costs and variable costs equal to 10% of sales.Net working capital equal to 30 percent of sales will be requiredto support the project and built up in the beginning. All of thenet working capital will be recouped at the end of the project. Thefirm desires a minimal 12 percent rate of return on this project.The tax rate is 30 percent.
1. What is the value of the depreciation tax shield in year 3 ofthe project? (Answer is 96000?)
2. What is the amount of the net (after-tax) salvage value ofthe equipment? (Answer is 126,000?)
3. What is the recovery amount attributable to net workingcapital at the end of the project?
4. What is the operating cash flow each year?
5. What is the IRR of this project?
