Uber is considering a new project. You have the following information: • Estimate life of the...

Uber is considering a new project. You have the following information:

• Estimate life of the project is 3 years.

• Expect sales of $15,000,000 for the first year of the forecast with sales to grow by 25% and 10%, respectively, for years 2 & 3.

• Variable costs (COGS) are 60% of sales. Fixed costs (SG&A) are $2,000,000 per year.

• They require a machine that costs $11,000,000 and will be depreciated using MACRS under a 3-year convention (.3333/.4445/.1481/.0741) The tax rate is 21%.

• Interest expense is $1,000,000 per year.

• Initial net operating working capital is $1,500,000. Net operating working capital for years 1 and 2 is 10% of NEXT year sales. All net operating working capital will be returned at the end of year 3.

a. They decide to sell the machine at the end of year 3 for $2,500,000. Find the free cash flows for years 1, 2 and 3.

b. The cost of capital is 10%. Find the net present value, internal rate of return and modified internal rate of return. Should the project be accepted?

Please show work!

Solutions

Expert Solution

Answer (a):

Answer (b):

Net present value = $2,144,976.21

Internal rate of return = 18.05%

Modified internal rate of return = 15.96%

Yes.

Project should be accepted.

Reason:

NPV is positive

IRR > Cost of Capital

MIRR > Cost of Capital

Working:

Above excel with 'show formula' is as follows:

jeff jeffy answered 1 year ago

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