ABC corporation has existing property and equipment that is not in use. The company is considering the use of this property and equipment. One option is to use the property and equipment to produce a new product. Estimates for demand of this product are 30,000 units annually for the first 5 years and 20,000 units annually for the following 6 years. Beyond that, the product is considered to be obsolete and production will cease. Price and variable costs would be $100 and $65, respectively. Fixed costs would be $225,000 per year. If they take this option, they must buy additional equipment for a total of $2 million. This equipment will be depreciated straight-line over a 15 year period of time. When the project is ended (in 11 years), it is expected they will be able to sell the equipment for $130,000. This option also requires an initial net working capital investment of $400,000. This initial NWC investment can be reduced to $300,000 when sales drop (i.e. from year 5 to year 6). The net working capital will be fully recouped at the end of the project. This project is riskier than the average project for the company. Management has determined that the appropriate discount rate to use will be the company WACC + 3% to account for the additional risk.

11. What is this projects OCF for years 1-5?

12. What is this projects OCF for years 6-11?

13. What is this projects TCF for year 0?

14. What is this projects TCF for years 1-5?

15. What is this projects TCF for year 6?

16. What is this projects TCF for years 7-10?

17. What is this projects TCF for year 11?

18. What is the projects NPV?

19. What is the projects break-even price?

20. Does this company have the internal resources to finance this project?

a. Yes

b. No