Question

As a financial analyst, you must evaluate a proposed project to produce printer cartridges. The purchase price of the equipment, including installation, is $65,000, and the equipment will be fully depreciated at t = 0. Annual sales would be 4,000 units at a price of $50 per cartridge, and the project’s life would be 3 years. Current assets would increase by $5,000 and payables by $3,000. At the end of 3 years, the equipment could be sold for $10,000. Variable costs would be 70% of sales revenues, fixed costs would be $30,000 per year, the marginal tax rate is 25%, and the corporate WACC is 11%.

1.What is the required investment after bonus depreciation is considered, that is, the Year 0 project cash flow?

2.What are the project’s annual cash flows?

a) Project cash flow year 1 = $

b) Project cash flow year 2 = $

c) Project cash flow year 3 = $

3.If the project is of average risk, what is its NPV? Should it be accepted or rejected? (Round final answer to whole numbers.)

NPV = $

Accept or Reject?  project

4.Management is uncertain about the exact unit sales. What would the project’s NPV be if unit sales turned out to be 20% below forecast, but other inputs were as forecasted? Would this change the decision?

NPV = $

Accept or Reject?  project

Answer 1

1)

4)