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2 . Lawton Enterprises is evalua ng a project with the following characteris cs: Fixed capital investment is $ 2 , 0 0 0 ,

2. Lawton Enterprises is evaluang a project with the following characteriscs:
Fixed capital investment is $2,000,000
The project has an expected 6-year life
The inial investment in working capital is $200,000. At the end of each year, working capital
must be increased so that the cumulave investment in net working capital is one-sixth the
next years projected sales.
The Fixed capital is depreciated 30 percent in year 1,35 percent in year 2,20 percent in year
3,10 percent in year 4,5 percent in year 5, and 0 percent in year 6.
Sales are $1,200,000 in year 1. They grow at a 25 percent annual rate for next two years, and
then grow at a 10 percent annual rate for the last three years.
Fixed cash operang expenses at $150,000 for years 1-3 and $130,000 for years 4-6.
Variable cash operang expenses are 40 percent of sales in year 1,39 percent of sales in year
2, and 38 percent of sales in years 3-6.
Lawtons marginal tax rate is 30 percent.
Lawton will sell its fixed capital investments for $150,000 when the project terminates and
recapture its cumulave investment in net working capital. Income taxes will be paid on any
gains.
The projects required rate of return is 12 percent.
If taxable income on the project is negave in any year, the loss will offset gains elsewhere in
the corporaon, resulng in a tax savings.
a. Determine if this is a profitable investment using NP1 and IRR
b. If the tax rate increases to 40 percent and the required rate of return increases to 14
percent, is the project sll profitable?
Can you use this excel sheet with showing formulas? Thank you!!
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