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ABC Inc

Finance

ABC Inc. projects unit sales for a new project with a life of FOUR YEARS as follows:

 

Year Unit Sales

1 10,000

2 12,000

3 14,000

4 16,000

 

Production will require Lowell must have an amount of NOWC on hand equal to 12 percent of the upcoming year's sales. Total fixed costs are $100,000 per year, variable production costs are $240 per unit, and the units are priced at $300 each. The sale price and variable costs will increase by 2 percent every year. The equipment needed to begin production has an installed cost of $2,000,000. The equipment qualifies as 5-year MACRS property.

 

Years Depreciation rate

  1. 20%
  2. 32%
  3. 19%
  4. 12%

 

 

In FOUR years, this equipment can be sold for about 24 percent of its acquisition cost. ABC is in the 25 percent marginal tax bracket and has a required return on all its projects of 18 percent. Based on these preliminary project estimates, what is the Free Cash Flow for the Year 0 of the project?

 

Free cash flow = Total Initial Investment + Total annual project CF + Total Salvage Value

  1. -2,360,000
  2. -2,330,000
  3. -2,300,000
  4. -2,390,000

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