Question

"Snow Inc. has just completed development of a new cell phone. The new product is expected to produce annual revenues of $1,400,000. Producing the cell phone requires an investment in new equipment, costing $1,500,000. The cell phone has a projected life cycle of 5 years. After 5 years, the equipment can be sold for $180,000. Working capital is also expected to decrease by $200,000, which Snow will recover by the end of the new product’s life cycle. Annual cash operating expenses are estimated at $820,000. The required rate of return is 8%."Required:Prepare a schedule of the projected annual cash flows.

Answer 1

Answer:

Explanation:

Attached is a workbook with a schedule of Projected annual cashflow for Snow Inc.. The annual cashflow entries are projected using a rate of 8%. For instance, in the first year, our cashflows are not subject to any projection. But in the second year, the annual revenue of $1400000 is projected using the required rate of return.

Revenue (second year) = 1400000[1+0.08]^1

= 1400000 × 1.08

Revenue = $1,512,000

This technique was used to project the value for all cashflow elements for the rest of the years in consideration.