Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Arnold Inc. is considering a proposal to manufacture high - end protein bars used as food supplements by body builders. The project requires use of

Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired
three years ago for $2 million and which it currently rents out for $122,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront
investment into machines and other equipment of $1.6 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to
terminate the project at the end of eight years and to sell the machines and equipment for $433,000. Finally, the project requires an initial investment into net working capital equal to 10% of
predicted first-year sales. Subsequently, net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be $4.8 million in the first year and to stay
constant for eight years. Total manufacturing costs and operating expenses (excluding depreciation) are 80% of sales, and profits are taxed at 30%.
a. What are the free cash flows of the project?
b. If the cost of capital is 15%, what is the NPV of the project?
a. What are the free cash flows of the project?
The FCF for year 0 is $ million. (Round to three decimal places.)
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Algorithmic Finance A Companion To Data Science

Authors: Christopher Hian-ann Ting

1st Edition

9811238308, 978-9811238307

More Books

Students also viewed these Finance questions