Question

16,17,18

Cranberry Manufacturing Company is considering to purchase a new control device. The cost of the new device is $36.000, and the machine will be depreciated straight-line over a two-year period to zero salvage value. The firm's tax rate is 30%) At the outset of the project, Cranberry anticipates investing $2,500 in raw materials inventory. Management has decided to terminate the project in two years and sells the device at an anticipated used price of $6,500. Please use the following information for the next 3 questions Cranberry has forecast sales and costs over the two - year time horizon: 2. 1 Year 85,000 17,000 95,000 25,000 4,500 Sales Cost of Goods Other Costs o3 pnhablanc3,3000 orlbadua er rs nun vldedong Cranberry expects that it will have to add about $3,000 per year to its net n 1o working capital in year 1 (i.e., net working capital investment in year 1 isiene bunt 8w $3,000), and add nothing in year 2. bost hogenes bai bluorda 1 on dau 16. What is the initial investment, i.e., start-up cost (Co)?ens Tadbaue a. $36,000 b.$38,500 c. $33,500 Sped won jouni ers sslg o bluorta hocen d. $37,75022i,a Please Show Your Calculation Steps Below nsleviups rt 2 o leso fsunns e ner 1s apce won ertt to iow leunns nat s bla ar mot bej deeo leunne to rhow auns tos but

Answer 1

16. Initial investment : b. $38,500

17. Net Operating cash flow at year 1 : a. $48,250

18. Net Operating cash flow at year 2 : b. $56,190

Note that cash from from sale of device will not be added in net operating cash flow, because it belongs to cash flow from investing activities.

Working:

Year 1 Year 2 Year 0 (36,000) (2,500) Particulars Upfront Investment Investment in net working capital Cash Flows after tax Saving in tax due to depreciation Net Cash Flow / Operating cash flow After tax cash flow on sale of Device Total Cash flow (3,000) 45,850 5,400 48,250 5,500 45,290 5,400 56,190 4,550 60,740 (38,500) (38,500) 48,250

Net working capital will be released when the project is ended. And investing in inventory is part of working capital.

Cash Flows after tax Year 1 Sales 95,000 Less: Cost of Goods 25,000 Less: Other Costs 4,500 Cash Flows From Operations (x) 65,500 Tax Rate 30% Tax (y) 19,650 Cash flow after Tax (x-y) 45,850 Year 2 85,000 17,000 3,300 64,700 30% 19,410 45,290 Saving in tax due to depreciation Cost of Device 36,000 Useful life Depreciation (a) 18,000 Tax Rate (b) 30% Tax Saving on depreciation (a*b) 5,400 After tax cash flow on sale of Device Anticipated Sale price 6,500 Tax rate 30% Tax 1,950 After tax cash flow 4,550