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 income statement 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 34 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 be about €400 per unit, and the product should have a four-year life.

Fixed costs for the project will be €450,000 per year. Further, we shall need to invest a total of

€1,250,000 in manufacturing equipment. This equipment is depreciated using 20 per cent reducingbalance for tax purposes. In 4 years the equipment will be worth about half of what we paid for it. We shall 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 sales.