CAPITAL BUDGETING CASH FLOW ESTIMATION

PROPOSED PROJECT

Machine cost $200,000

Shipping cost $10,000

Installation cost $30,000

Net investment in operating working capital (NOWC) is estimated to be 10% of Year 1 annual sales, which is required at year 0; and is expected to be fully recovered at the end of the projects life.

Project (Economic life) 4 years

Salvage value $25,000

Depreciation method MACRS 3-year class with depreciation rates as follows:

Year 1=33%; Year 2=45%; Year 3= 15%; Year 4=7%

Estimated Annual Sales and Costs:

	Year 1	Year 2	Year 3	Year 4
No. of units	1,250
Unit price	$200
Unit cost	$100

++ = Unit sales increase at 2% p.a. for Yr 2; 3% for yr 3; and 4% for yr 4

**Price increase annually at 4%p.a and cost increase annually at 3% p.a.

Tax rate = 40%

Projects cost of capital = 10%

Is the proposed project viable? Use NPV and IRR to make your decision.