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A firm was created to undertake a project which required an initial cash outlay of $3 million and a $25,000 increase in working capital. The

A firm was created to undertake a project which required an initial cash outlay of $3 million and a $25,000 increase in working capital. The product sells $75 per unit. Anticipated demand is 10,000 units for the for 3 years. Annual fixed costs are $50,000 and variable costs are 35% of sales. Assume straight line depreciation with a $2.8 million salvage value and a 35% tax rate.

The firm has a $7 million par value bond issue outstanding (7,000 bonds with par values of $1,000 each) paying a 4% coupon rate, with 15 years remaining until maturity.

a. What is net working capital? How does it impact project and fim valuation?

b. Year 0 Year 1 Year 2 Year 3
Initial Cost
Interest
Cfop

c. Define and explain the cash flow from operations. Why is this used for project valuation? What must be done to this cash flow information in order to calculate firm value?

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