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?