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A Corporation has 3 4 % marginal tax bracket with a 3 0 % required rate of retum or cost of capital, is considering a
A Corporation has marginal tax bracket with a required rate of retum or cost of capital, is considering a new project. This project involves the introduction of a new product. The project is expected to last five years and then, because this is somewhat of a fad project, to be terminated.
Cost of new plant and equipment: $
Shipping and installation cost: $
Unit Sales:
tableYearUnit sold
Sales price per unit: $ unit in years $unit in year
Variable cost per unit: $ unit
Annual fixed costs: $
Working Capital Requirement: There will be an initial working capital requirement of $ just to get production started. Then, for each year, the total investment requirement in NWC will be equal to of the dollar value of sales for that year. Finally, of working capital is liquidated at the termination of the project at the end of year
The Depreciation Method: Assume that Straight Line Method will be used over years. It is assumed that of the plant and equipment will be liquated at year
Given the following information,
a Determine the free cash flows associated with the project,
b Calculate and comment on the project's NPV
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