# Excplain the income statement

1.Your company has decided to produce a new line of television/electronic media player.  You estimate that your company will sell 51,000 per year, and that this product will sell for \$750 each.  The plant and equipment (new fixed assets) needed to manufacture this product costs \$22,400,000 and will be depreciated on a straight-line basis over the seven year project.  Additional manufacturing costs to produce the media players would total \$16,980,000 each year.  The tax rate is 40%.

Sketch a simplified income statement and calculate the firm’s operating cash flow. That is, explain what goes on each line of the income statement.

2.

A production project will generate an expected operating cash flow of \$50,000 per year for 4 years (years 1 – 4).  Undertaking the project will require an increase in the company’s net working capital (inventory) of \$10,000 today (year 0).  At the end of the project (year 4), inventory will return to the original level.  The project would cost \$150,000.  The weighted average cost of capital for the firm is 9%.

Sketch a timeline (explain what amount is considered in each year of the timeline) to illustrate the relevant cash flows.  What is the net present value of this project?