The Lee & Pearson Company is considering an expansion of its production facilities which will permit the firm to build and sell a new line of cell phones. The project requires a $10,000,000 capital investment and is expected to have a three-year economic life.
Other relevant information is:
At the end of the project, the equipment can be sold for $300,000.
The firm's WACC is estimated at 8%.
Incremental sales are projected to be $12,000,000 per year.
Annual costs (excluding depreciation) are estimated to be $3,000,000.
The project requires a $2,000,000 initial investment in net operating working capital.
The expected tax rate is 33%.
The MACRS depreciation schedule in the list below will be used.
YEAR 1 = 0.4445
YEAR 2 = 0.3333
YEAR 3 = 0.1481
YEAR 4 = 0.0741
A) What is the project cash flow for year 0?
B) What is the project cash flow for year 1?
C) What is the project cash flow for year 2?
D) What is the project cash flow for year 3?