Question

I completed chapter 12 problem 13.

I need to complete the following in addition to calculating the project cash flows: compute the NPV and IRR. Given a 10% cost of capital, would you recommend pursuing the project?

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a three-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets, which will be depreciated straight- line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What will the cash flows for this project be?

Initial Investment	-$165,000
YEAR	0	1	2	3
Sales units		1,000	1,250	1,325
Prices per unit		$400	$400	$400
Sales revenue		$400,000	$500,000	$530,000
Variable cost per unit		$225	$225	$225
Less: Total variable cost		$225,000	$281,250	$298,125
Less: Fixed cost		$100,000	$100,000	$100,000
Less: Depreciation		$55,000	$55,000	$55,000
EBIT		$20,000	$63,750	$76,875
Less: Tax at 34%		$6,800	$21,675	$26,138
Profit after tax		$13,200	$42,075	$50,738
Add: Depreciation		$55,000	$55,000	$55,000
Add: After tax salvage value	-$80,000			$23,100
Change in NWC	-$245,000	-$20,000	-$6,000	$106,000
Cash flows		$48,200.00	$91,075.00	$23,4837.50
Change in NWC:
Sales	$0	$400,000	$500,000	$530,000
NWC	$80,000	$100,000	$106,000	$0
Change in NWC	-$80,000	-$20,000	-$6,000	$106,000

Answer 1