NVAS
Become a Thought
tcc canvas
Question 1
5 pts
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the
demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy day anyway?)
The proposed project has the following features;
• The firm just spent $300,000 for a marketing study to determine consumer demand (@t=0).
• Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and
owns it outright (that is, it does not have a mortgage). The land has a current market value of
$2,600,000.
• The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject to
depreciation).
• If the project is undertaken, at t = 0 the company will need to increase its inventories by
$3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net
operating working capital will be recovered at the end of the project's life (t = 10).
• If the project is undertaken, the company will realize an additional $8,000,000 in sales over each
of the next ten years. (i.e. sales in each year are $8,000,000)
• The company's operating cost (not including depreciation) will equal 50% of sales.
• The company's tax rate is 35 percent.
• Use a 10-year straight-line depreciation schedule.
At t = 10, the project is expected to cease being economically viable and the factory (including
land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase
price).
• The project's WACC = 10 percent
• Assume the firm is profitable and able to use any tax credits (i.e. negative taxes).
What is the operating cash flow @t=1? Round to nearest whole dollar value.
