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Used Equipment requirements $2,000,000 After 2 years, you intend to
sell the equipment for $500,000 and replace the equipment with
$5,000,000 of new equipment

Cost of intital inventory and supplies $500,000

You use the $1m for the reasearch and as a partial payment toward
the equipemnt. You fund the remaining equipment and working capital
with a credit line. The credit line requires a 10% interestpayment
everyyear, but requires no principle paymnets. You will need to
extend the credt line further when you sell the oldequipment, pay
down thecredit line with the proceedsand then further extene the
credit line for the new equipment purchase.

1st year sales $1,200,000

Sales growth 5% for first 3 years - 2% growth years 4 & 5

Cost of goods sold - 30% of sales

Selling, general and administrative - 15% of sales

Fixed costs = $240,000 per year

Depreciation - 7 years MACRS

Tax Rate - 35%

Discount Rate - 8%

1.      What is the cash flow resulting from disposal of the
equipment at the end of 2 years?
2.      Computer a schedule of operating cash flows forthe 5 years.
3.      Compute a schedule of increamtnal cash flows for the
4.      Compute the projects net present value
5.      Should we accept or reject the project

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