3. (20 points) Firm ABC considers investing in a project of building a product line which has a life span of 4 years. The important financial characteristics of the project are outlined as follows. The forecasted sales quantity of the to-be-produced product is 1 million units in the first quarter, equally spread over all weeks of the quarter, then it would increase 5% quarter-over-quarter for the remaining time (all the quarterly production quantities are equally spread over the weeks in a quarter). The sales price is $100 per unit. Cost of Good Sold (COGS) is $60 per unit. Sales and costs are incurred at the end of each quarter. However, there are 4 weeks delay in receiving the actual payments for units sold (namely, there is a delay for the firm to receive the realized revenue) as well as 6 weeks delay for the firm to actually pay out the COGS. The firm needs to hold 2 weeks of the current quarter's production quantity as inventory. The capital expenditure is expected to be 150 millions now and will be depreciated to zero value following a straight-line schedule over the 16 quarters. Corporate tax rate is 40%. The cost of capital of this firm is quoted as an annual percentage rate (APR) of 20%. Use the above information to answer the following questions. (a) (5 points) For years 1 and 2, use a tabular format to show the earmings of all quarters. (b) (5 points) For years 1 and 2, use a tabular format to show net working capital requirements of all quarters. (c) (10 points) Shall the firm invest in this project? Provide a detailed analysis to justify your conclusion. 3. (20 points) Firm ABC considers investing in a project of building a product line which has a life span of 4 years. The important financial characteristics of the project are outlined as follows. The forecasted sales quantity of the to-be-produced product is 1 million units in the first quarter, equally spread over all weeks of the quarter, then it would increase 5% quarter-over-quarter for the remaining time (all the quarterly production quantities are equally spread over the weeks in a quarter). The sales price is $100 per unit. Cost of Good Sold (COGS) is $60 per unit. Sales and costs are incurred at the end of each quarter. However, there are 4 weeks delay in receiving the actual payments for units sold (namely, there is a delay for the firm to receive the realized revenue) as well as 6 weeks delay for the firm to actually pay out the COGS. The firm needs to hold 2 weeks of the current quarter's production quantity as inventory. The capital expenditure is expected to be 150 millions now and will be depreciated to zero value following a straight-line schedule over the 16 quarters. Corporate tax rate is 40%. The cost of capital of this firm is quoted as an annual percentage rate (APR) of 20%. Use the above information to answer the following questions. (a) (5 points) For years 1 and 2, use a tabular format to show the earmings of all quarters. (b) (5 points) For years 1 and 2, use a tabular format to show net working capital requirements of all quarters. (c) (10 points) Shall the firm invest in this project? Provide a detailed analysis to justify your conclusion
