Good day anyone I was asked to create the Projected Cash Flow Schedule, but I am unsure how to calculate sales for each year for the generator.

The questions is:

The Jonas Farming Company is evaluating the proposed acquisition of a generator and a milling machine. Both the generator and the milling machine would have an economic life of 3 years.

The following information pertains to the proposed purchase of the generator:
The generator’s base price is $120,000 and it would cost another $15,500 to install and modify it for special use by the firm. The generator falls into the MACRS 3-year class, and it would be sold after three years for $36,000. The generator would require an initial injection in net working capital of $5,500. Thereafter, net working capital is projected to increase at a rate of 5.50% per annum.

The generator would have no effect on revenues, but is expected to save the firm $50,000 per year in before tax operating cost (excluding depreciation).



The following information pertains to the proposed purchase of the milling machine:

The milling machine’s base price is $100,000 and it would cost another $5,000 to install it. The generator falls into the MACRS 3-year class, and it would be sold after three years for $40,000. The generator would require an initial injection in net working capital of $4,000. Thereafter, net working capital is projected to increase at a rate of 4.00% per annum.

The milling machine would generate additional revenue of $55,000 in year 1; revenue is expected to increase at a rate of 3% per annum thereafter. Cost (fixed and variable, excluding depreciation) is expected to be $10,000 in year 1; cost is expected to increase at a rate of 2% per annum thereafter.



Additional Information:

• Jonas’ capital structure comprises solely of debt and common equity. Jonas has 25 million shares of common equity stock outstanding and the last quoted price per share was $3. The company’s stock beta is 2.30. The book value of its long term debt is $50 million, with an average life and coupon of 3 years and 7% (per annum) respectively. Based on discussions with an investment bank, the company infers that it can issue new debt (3 year tenor) at a yield to maturity of 9.5%.
• Jones’ marginal tax rate is 35%.
• For capital budgeting purposes, the company’s policy is to assume that all cash flows occur at the end of each year.
• In the event that cash flow before taxes is negative, a tax credit would be generated.
• The current risk free rate is 2.5% and the equity risk premium is 5%.

Question
a. Prepare a projected cash flow schedule for both the generator and the milling machine. Identify for both proposals: 20 marks
1. The net cash flow for year 0
2. The accumulated depreciation as at the end of year 3
3. The net salvage value
4. The expected recovery of working capital as at the end of year 3