(Calculating cash flows in a comprehensive problem) Mark McNibble is CFO for McNabb Fabrications, Inc. Mark is considering a new project that involves the introduction of a new product. McNabb is in the 34 percent marginal tax bracket has a 15 percent required rate of return or discount rate for new investments. The new project is expected to last five years, and then, because this is somewhat of a fad product, it will be terminated. Given the following information, determine the net cash flows associated with the project and the project’s NPV, profitability index, and internal rate of return. Apply the appropriate decision criteria.

Sales price per unit: $800/unit in Years 1–4, $600/unit in Year 5 Variable cost per unit: $400/unit Annual fixed costs: $10,000,000 Working-capital requirements: There will be an initial working-capital requirement of $2,000,000 just to get production started. For each year, the total investment in net working capital will equal 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during Years 1 through 3 and then decrease in Year 4.

Finally, all working capital will be liquidated at the termination of the project at the end of Year 5.

The depreciation method: Use the simplified straight-line method over five years. It is assumed that the plant and equipment will have no salvage value after five years.

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Cost of new plant and equipment: $198,000,000 Shipping and installation costs: $2,000,000 Unit sales: Year Units Sold 12345 1,000,000 1,800,000 1,800,000 1,200,000 700,000