Question

The Dolphin Corporation, a firm in the 40 percent marginal tax bracket with a 9 percent cost of capital, is considering a new project. This project involves the introduction of a new product. This project is expected to last 4 years and then to be terminated. Cost of new plant and equipment is $990,000. Shipping and installation costs are $10,000. The company needs to increase its working capital requirement. There will be an initial inventory requirement of $15,000 just to start the production. Out of this amount, the company can owe money in the form of account payable. The payable will increase by $3,000. All the investment in working capital is paid at the termination of the project at year 4. The company expects to sell 27,000 units per year in four years. Sales price per unit is $25 per year. Total variable cost of productions is $10 per unit.    At the end of 4th year, the equipment should have a market value, which equals to salvage value because book value of the equipment is zero, of $50,000. The assets would be depreciated under MACRS with 3- year life. Year 1 depreciation rate is 33%, year 2 is 45%, year 3 is 15%, and year 4 is 7%.

Questions:

a. Given the information, fill in the excel work sheet to estimate the net cash flows of the project.

b. Determine the NPV, IRR, and payback period of the project.

c. What is your recommendation about the project?

Answer 1