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Superior Manufacturing Project

DATA:

Forecasted Sales – Year 1; $950,000 Year 2 & On; $1,500,000

Direct Costs (including labor and materials) – 55% of sales

Indirect Incremental Costs - $80,000 per year

New Plant - $1,000,000

Depreciation of new plant – 5 year straight line

Net investment in Inventory & Receivables - $200,000

Marginal Tax Rate – 35%

Capital Costs – 10%

Step 1(statement): (Gitman, 2006):

Calculation of Incremental Cash Flows for Superior Manufacturing's Proposed Project
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Revenue $950,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000
Direct Costs (55%) * $522,500 $825,000 $825,000 $825,000 $825,000 $825,000 $825,000 $825,000
Indirect Costs $80,000 $80,000 $80,000 $80,000 $80,000 $80,000 $80,000 $80,000
Depreciation * $200,000 $200,000 $200,000 $200,000 $200,000 0 0 0
Earnings before interest & taxes * $147,500 $395,000 $395,000 $395,000 $395,000 $595,000 $595,000 $595,000
Taxes (35%) * $51,625 $138,250 $138,250 $138,250 $138,250 $208,250 $208,250 $208,250
Depreciation * $200,000 $200,000 $200,000 $200,000 $200,000 0 0 0
Net Incremental Cash Flow * $295,875 $456,750 $456,750 $456,750 $456,750 $386,750 $386,750 $386,750
* Depreciation was figured by taking the 1M that is needed for a new plant and divided it into 5 years.
* EBIT was figured by subtracting direct costs, indirect costs, and deprecation from the revenue.
* Taxes were figured by taking the EBIT and multiplying it by 35%.
* Net Incremental Cash flow was figured by subtracting taxes from EBIT then adding depreciation.
* Direct costs were figured by taking the revenue and multiplying it by 55%.

Step 2 (P/B & NPV): (Gitman, 2006):

Relevant Cash Flow and Payback Periods for Superior Manufacturing' Project
New Product Project
Initial Investment * $1,200,000
Year Cash Inflows
1 $295,875
2 $456,750
3...