Fin 419 - Mini-Case Biocom, Inc.
Essay by Denise Martin • May 8, 2017 • Case Study • 2,931 Words (12 Pages) • 1,739 Views
Mini-Case Biocom, Inc.: Part 2
Denise Martin
FIN/419
April 17, 2017
Michele Huss
Mini-Case Biocom, Inc.: Part 2
Complete Questions 1-7;
- What is the total relevant initial investment for Biocom’s new product line? Would you include the designs and prototypes? Would you include the change in net working capital?
The total relevant initial investment for Biocom’s new product line, including the change in net working capital is as follows:
Cost of a new plant and equipment: $24,000,000
Increase net working capital $480,000
$24,480,000
The cost of designs and prototypes would be considered sunk costs and would not be included in the investment.
- What is the cash flow resulting from disposal of the equipment at the end of the project?
Disposal $2,400,000
Book value $1,382,400
Gain on disposal $1,017,600
34% tax $345,984
Cash flow from disposal $2,054,016
- Compute a schedule of depreciation for the plant and equipment.
Depreciation schedule is as follows:
Year 1 2 3 4 5 6
Rate 20% 32% 19.2% 11.52% 11.52% 0.0576%
Depreciation 4800000 768000 2764800 2764800 2764800 1382400
- Compute a schedule of operating cash flows for Biocom’s new product.
Operating cash flow as follows:
Year 1 _ 2 _ 3 _ 4 _ _ 5
Revenue $16500000 $17490000 $18539400 $19651764 $20830870
COGS $6600000 $6996000 $7415760 $7860706 $8332348
Fixed costs 600000 600000 600000 600000 600000
S,G,&A, 825000 699600 926970 982588 1041543
Depreciation 4800000 7680000 4608000 2764800 2764800
EBIT 3675000 1514400 4988670 7443670 8092178
Taxes 1249500 514896 1696148 2530848 2751341
Net Income 2425500 999504 3292522 4912822 5340838
Add back 4800000 7680000 4608000 2764800 2764800
Erosion costs 1650000 1650000 1650000 1650000 1650000
Operating cash flow 5575500 7029504 6250522 6027622 6455638
- Compute a schedule of incremental cash flows for Biocom’s new product.
Incremental cash flow as follows:
T0 T1 T2 T3 T4 T5
Capital spending (24000000)
Change in NWC (480000) 480000
OCF 5575500 7029504 6250522 6027622 6455638
Disposal cash flow 2054016
Incremental cash flow (24480000) 5575500 7029504 6250522 6027622 8989654
- Compute the projects net present value.
NPV (24480000) 5575000/1.09 7029504/1.092 6250522/1.093 6027622/1.094 8989654/1.095
Cash flow discounted at 9%
(24480000) 5114678.9 5916592.88 4826549.83 4270119.39 5842658.29
Summing the discounted cash flows, NPV 1,490,599.29
- Does your answer to question 6 indicate that management should accept or reject the product?
The net value is a positive one, which says that the project should be accepted.
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