Question

ABC Company is considering a 3-year project, which will add a new product to its portfolio; last year, the company hired a consultant to explore this market opportunity and paid $1 million for the research report - this amount will be depreciated over the next four years; if the company proceeds with the launch of the new product, it will need to invest $26.0 million in new equipment, which will be depreciated straight line over 4 years with no remaining salvage value.

-The project is expected to generate $12 million in sales (revenue) in the first year of the project; the sales are expected to increase by 50% in the second year, double in year 3 compare to year 2, and double again in year 4.  

-COGS is expected to be 55% of sales

-SG&A expenses will be $5.5 million each year

-The company pays income tax rate of 23.0%

-The cost of capital is 9.7%

-Working capital will start from zero and reach 20% of sales by the end of the first year and will stay at 20% of sales each year though the end of the project; working capital will be fully recovered at the end of the project;

Calculate the following:

1) Free cash flows of the project

2) NPV

3) IRR

4) Payback period

5) should the company invest in this project?

Answer 1