In: Finance
• The project requires $25 million in initial capital
investment, and will have an economic lífe of 5 years. The
investment will be straight-line depreciated down to a book value
of zero at the end of 5 years. The investment is expected to be
salvaged for $5 million at the end of 5 years.
• The projected sales are $20 million per year from year 1 through year 5, variable costs are 50% of annual sales, and fixed costs are $3 million per year.
• The corporate tax rate is 20 percent.
• The weighted average cost of capital applicable to the proposed project is 8% Ignore investment in net working capital.
a) compute the cash flow from assets for each year. ("cash flow from assets" = "free cash flow")
b) What is the NPV of the project?
c) If the projected annual sales decrease by 5% to $19 million per year, how much would the project's NPV change?
you can find the present value in the present value factor table in your book or at Google. In that look at 8%, you will find the values corresponding to the year.