Question

• The required equipment would cost $160,000, plus an additional $35,000 for shipping and installation. • In addition, inventories would rise by $26,000, while accounts payable would go up by $6,000. All of these costs would be incurred at Year 0. (In other words, increase net working capital is $25,000) • By a special ruling, the machinery could be depreciated under the MACRS system as 3-year property. Year 1 : 33%, Year 2: 45%, Year 3: 15%, Year 4: 7% • The project is expected to operate for four years, at which time it will be terminated. • The cash inflows are assumed to begin one year after the project is undertaken, or at t = 1, and to continue out to t = 4. • At the end of the project’s life (Year 4), the equipment is expected to have a salvage value of $35,000. • Unit sales are expected to total 100,000 units per year, and the expected sales price is $3 per unit. • Cash operating costs for the project (total operating costs less depreciation) are expected to total 55% of dollar sales. • Marginal tax rate is 21%, and its WACC is 10.5%.

What is the amount of initial cash flows, incremental operating cash flows, and terminal cash flows and Calculate the project’s NPV, IRR, MIRR, Payback and Discount payback.

Answer 1