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12-22 (Related to Checkpoint 12.1 on page 378) (Comprehensive problem-calculatin g project cash flows, NPV, PJ, and IRR) Traid Winds Corporation, a firm in the
12-22 (Related to Checkpoint 12.1 on page 378) (Comprehensive problem-calculating project cash flows, NPV, PJ, and IRR) Traid Winds Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or discount rate, is considering a new project. This project involves the introduction of a new product. This project is expected to last five years and then, because this is somewhat of a fad project, it will be terminated. Given the following information, determine the net cash flows associated with the project, the project's net present value, lhe profitability index, and the internal rate of return. Apply the appropriate decision criteria. |
Cost of new plant and equipment 14,800,000 |
Shipping and installation cost 200,000
Unit Sales
|
Sales price per unit: $300/unit in Years 1-4, $250/ unit in Year 5 |
Variable cost per unit: $140/unit |
Annual fixed cost: $700,000 |
Working capital requirements: There will be an initial working capital requirement of $200,000 to get production started. For each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during Years l through 3, then decrease in Year 4. Finally, all working capital is 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 bave no salvage value after five years |
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