Question

Firm A’s new project needs $325,000 for new fixed assets (long term assets), $160,000 for additional inventory and $35,000 for additional accounts receivable. This is a five year project. Use straight line depreciation approach to calculate the depreciation expenses. By the end of the fifth year, the value of the fixed assets = 0. However, the market value of the assets = 25% of their original cost. At the end of the project, the net working capitals tend to return to its original level. Annual sales is expected to be $554,000 and costs = $430,000. The tax rate = 35%. Required rate of return = 15%.

1.What is the initial cost of this project?

2. What is the operating cash flows from year 1 to year 4

3. What is the operating cash flows in year 5 (last year)

4. Calculate npv

Project S and Project L are two projects under consideration, both projects have 3-year lives.
The projects' cash flows are as follows (in thousands of dollars):
	Year	CFL	CFS
	0	($200)	($200)
	1	$40	$150
	2	$100	$60
	3	$120	$50
(1) What is each project’s NPV? (5 points)
WACC	10%
NPVL =
NPVS =
(2)   What is each project’s IRR? (6 points)
IRRL =
IRRS =
(3) What is the crossover rate of the NPV profiles of the two projects? (3 points)
crossover rate =
(4)   Find the MIRRs for Projects L and S. (6 points total)
MIRRL =
MIRRS =

Answer 1

SEE IMAGES

Q.1

Q.2

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