1. 10.1 Capital budgeting for Project X Based on the following information for Project X, should we undertake the venture? To answer, first prepare a pro forma statement of profit or loss for each year. Next calculate operating cash flow. Finish the problem by determining total cash flow and then calculating NPV assuming a 28 per cent required return. Use a 30 per cent tax rate throughout. For help, look back at our shark attractant and power mulcher examples.

Project X involves a new type of graphite composite in-line skate wheel. We think we can sell 6 000 units per year at a price of $1 000 each. Variable costs will run about $400 per unit, and the product should have a four-year life.

Fixed costs for the project will run $450 000 per year. Further, we will need to invest a total of $1 250 000 in manufacturing equipment. For tax purposes, this equipment is depreciated at 20 per cent per annum on a reducing balance basis to zero over its 10-year life. In four years, the equipment will be worth about half of what we paid for it. We will have to invest $1 150 000 in net working capital at the start. After that, net working capital requirements will be 25 per cent of revenue.