What was the total cash flow for capital budgeting purposes (assume an all-equity firm) for ABC, Inc., in 2021?
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August 7, 2017What was the total cash flow for capital budgeting purposes (assume an all-equity firm) for ABC, Inc., in 2021?
ABC, Inc., is a company that started its business in 2015. During that year, the company raised capital by issuing 1,000 shares of common stock at par value of $50.
ABC, Inc. wants to produce and sell metallic screws. In order to do that, in 2015 the company bought and installed a metalworking machinery for $4,000. The machinery has a useful life of 5 years, and is depreciated over its life using straight line depreciation.
For fiscal years 2015-2020 assume the following information:
In 2015, the company buys metallic rods (raw materials) for the future production of screws. Each year, the company buys 10% of rods on credit and pays completely during the next year.
The price for the rods is $0.20 per 1 foot and is constant throughout the life of the project. You can produce 10 screws from 1 foot of the metallic rod.
Here is the amount of rods the company bought during each of the years (in feet):
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
| 20,000 | 22000 | 25,000 | 28,000 | 13,500 | 0 |
The production process starts in 2016. It costs $4 of labor to produce 10 screws.
ABC, Inc., sells its screws in packs of ten. The price per one pack is $4.50 and does not change. 10% of sales are done on credit and cash is fully collected during the next year.
Here are production levels and sales levels for each year (in screws):
| 2016 | 2017 | 2018 | 2019 | 2020 | |
| Production | 210,000 | 215,000 | 220,000 | 225,000 | 215,000 |
| Sale | 207,000 | 210,000 | 216,000 | 220,000 | 208,000 |
Selling, General, and Administrative expenses are $1,000 per year and are paid cash during the same year.
Taxes are 34% and are paid during the following fiscal year. At the end of each year, investors decided to reinvest 25% of earnings and use the rest to pay a cash dividend.
The following information is true for fiscal year 2021:
- There is no production of screws during 2021
- ABC, Inc., buys no metal in 2021
- ABC, Inc., sells all its leftover screws for $4.50 per pack
- ABC, Inc., sell its metalworking machinery for $300.
- All sales during 2021 are done cash only.
- There are no marketing costs in 2021.
- Any taxes for fiscal year 2021 are paid right away in 2021.
- Any remaining cash is distributed as a cash dividend to shareholders.
The discount rate is 10%.
- What was the total cash flow for capital budgeting purposes for ABC, Inc., in 2015? These are the investment costs of the project at time zero.
2.What was the total cash flow for capital budgeting purposes (assume an all-equity firm) for ABC, Inc., in 2016?
- What was the total cash flow for capital budgeting purposes (assume an all-equity firm) for ABC, Inc., in 2017?
- What was the total cash flow for capital budgeting purposes (assume an all-equity firm) for ABC, Inc., in 2018?
- What was the total cash flow for capital budgeting purposes (assume an all-equity firm) for ABC, Inc., in 2019?
- What was the total cash flow for capital budgeting purposes (assume an all-equity firm) for ABC, Inc., in 2020?
- What was the total cash flow for capital budgeting purposes (assume an all-equity firm) for ABC, Inc., in 2021?
- What was the NPV of the project given the 10% discount rate?
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