34% marginal tax bracket with a 15% required rate of return or cost of capital. Project is expected to last 5 years.
Cost of new equipment $7,900,000
Shipping and installation cost $100,000
Year 1 70,000
Year 2 120,000
Year 3 140,000
Year 4 80,000
Year 5 60,000
Sales price per unit $300/unit in years 1-4, $260 year 5
Variable cost per unit $180/unit
Annual fixed costs $200,000
Working capital requirements: $100,000 for production start. Each year, the total investment in net working capital will be equal to 10% of the dollar value of sales for that year. Investment in working capital will increase during years 1-3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5.
The depreciation method: Use the straight-line method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years.
1. What are the differential cash flows over the project’s life.
2. What is the terminal cash flow
3. What is its net present value
4. What is its internal rate of return
5. Should the project be accepted
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