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Project Cash flows Problems Delta Corporation Expansion Project Delta Corporation is considering an investment proposal (the Delta

Project) to expand one of its product lines. The project is planned to start by the beginning of 2001.The initial capital outlay in the first year is $ 1 million. At the end of year 3, another capital expenditure of $ 0.5 million is required for an upgrade. The economic life of the project is estimated to be eight years .The level of working capital is tabulated below . Year WC 0 2000 1 2500 2 3100 3 3600 4 4000 5 4300 6 4500 7 3000 8 0

The salvage value of the total capital expenditure ($1.5 million) at the end of the eighth year is estimated as $ 16000.The depreciation rate for initial investment, for tax purposes is 12.5 per cent annum. The upgrade depreciates at $ 100,000 per year for years 4 to 8. The forecast sales for the project are to be based on a time trend regression on the companys last seven years of sales shown in Table below. Delta Corporations historical sales Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Sales (Units) 500,000 550,000 540,000 560,000 565000 590,000 600,000 610,000 615559 669000 700,000

Forecast sales obtained from the time trend regression are to be adjusted from year 4 onwards to account for the increased sales resulting from the upgrade, which are estimated as 500,000 units per year. The selling price of the product is expected to be 50 cents per unit for the first five years and 75 cents thereafter .The production cost is estimated to be 10 cents per unit. Other operating costs (which do not include depreciation) are $ 50,000 per year for the first five years and $ 55000 per year for the rest of the project life. The corporate tax rate is 30 per cent. Show the detailed cash flow analysis which distinguishes between capital flows and operating flows

The Repco Replacement Investment Project Repco Corporation is considering a replacement investment. The machine currently in use was purchased two year ago for $ 49,000. Depreciation for tax purposes is $ 9800 per year for five years .The market value of this machine now is $ 35000. The new machine will cost $123,000 and requires $3000 for installation .Its economic life is estimated to be three years and tax allowable depreciation is $ 42000 per year for three years .If the new machine is acquired, the investment in accounts receivables is expected to rise by $ 8000 , the inventory by $ 25000 and accounts payable by $ 13000. The annual income before depreciation and taxes is expected to be $ 65000 for the next three years with the old machine and $ 122,000, $ 135,000 and$ 130,000 for the I,II and III years respectively with the new machine. The salvage values of the old and new machines three years from today is expected to be $ 3500 and $ 4000 respectively. The income tax rate is 25 per cent. This income tax applies to operating income as well as to the b0ok gains or losses on the machinery. Book gain or loss is defined as the difference between market value and the tax book value of the machine. Book value for taxation purposes is the original cost minus accumulated depreciation .