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Should Seals produce the cold rooms?
16 Replies
Seals Co.taxable company with overseas shareholders, has recently completed a $400,000, 2 year marketing study. Based on the results, Seals has estimated that 10,000 of its new cold rooms could be so…
Started this discussion. Last reply by Peter Quigley Feb 19.
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Becky
Are you able to post a definitive answer to this please? By my reckoning we have NPV answers corresponding to: 3.4m; 5.1m; 6.2m; 9.2m; 10.7m; and 0.45m?!
Thanks in advance
Peter
Hello Krishnan
1) I was wondering if you explain why the cost increase in working capital of 1.4m has been added to your Y9 cash flow [ 8.4 m less (2.52m of tax) to give 5.88 plus 1.4m =7.28m]?
Best Regards
Peter
well i agree with this
the taxable anount should be 6*0.3mm
Yes. NPV: USD 3.4 Mln. Pls see attached.
Seals should go ahead with the investment.
Annual Revenue $96,150,000
Total Expenses $86,000,000
Depreciation $4,250,000
Operating Profit $5,900,000
Tax $1,770,000
Net Profit $4,130,000
Cash Flow $8,380,000
NPV of ivestment $6,225,343.53
My calculations match yours except for:
the working capital addition of 1.4M US$ shouldn't be depreciated as this is a cash injection to cover cashflow deficit and wouldn't appear in the income statement.
in the NPV formula you shouldn't discount t…
No capital loss. The capital (equipment) itself is depreciated and has 0 book value and this is resulted in the amount of tax to be paid, hence impacting positively on the cash flow, thus can't recount it twice in calculating the Tax.
So the The ca…
Hi Krishnan, you did not take into account the neccesary increase of working capital. Can you indicate how you handled this ?
Sorry for confusing others abt my calculation.
When the project terminates at year 8, the equipment will be sold. The capital gain will be taxed.
But this case it has a capital loss (obviously).
Recall "At the end of the project's life the facili…
i do agree with the proposal .Pls see workings and guide me for any lapses
Thanks
Yes, Seals should produce the cold rooms.
Plz refer to working attached.
I agree with George A.Y. up to the 34*.3......I don't understand where the 34 is coming from either and agree with your numeric calculation Matt.
But taking this into account the outcome for this project still looks positive to me.
I had one input for the terminal cash flow: "$40 million facility will be depreciated prime cost to zero over the project's life" would mean that the capital gain would be 8.4mm (the sales price of the fully depreciated facility and the non-deprecia…
No problem in initial cash outlay but:
1. Land is $2.4 mm which should not be "depreciated".
2. "The $40 million facility will be depreciated prime cost to zero over the project's life"
3. Depreciation brings no CF directly except its tax shield.…
Is the 7.4k per cold room a setup cost (Installation cost) or an annual operating cost? I believe the operating cost is already included in the 12M Fixed Cost.
Initial cash outflow is 40mm + 2.4mm + 1.4mm = 43.8mm. $400000 spent on marketing study is a sunk cost and hence irrelevant for this decison making.
annual depreciation = [40mm - (8.4-2.4) ]/8 = 4.25. cost of land is excluded from residual value.…
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