Cash Flow Estimation You are given the responsibility of conducting the project selection analysis in your firm. You have to calculate the NPV of a given project. The cost of capital is 12% and the firm is in the 30 percent tax bracket. You are provided the following pieces of information regarding the project: 1. J. A. The project is going to be built on a piece of land that the firm already owns. The market value of the land is $1 million. B. If the project is undertaken, prior to construction, an amount of $100,000 would have to be spent to make the land usable for construction purposes. C. In order to come up with the project concept, the company had hired a marketing research firm for $200,000. -$900 D. The firm has spent another $250,000 on R&D for this project. E. The project will require an initial outlay of $20 million for plant and machinery. F. The sales from this project will be $15 million per year of which 20 percent will be from lost sales of existing products. G. The variable costs of manufacturing for this level of sales will be $9 million per year. H. The company uses straight-line depreciation. The project has an economic life of ten years and will have a salvage value of $3 million at the end. WACC Because of the project the company will need additional working capital of $1 million which can be liquidated at the end of ten years. Th The project will require additional supervisory and managerial manpower that will cost $200,000 per year. W o a ch K. The accounting department has allocated $350,000 as allocated overhead cost for supervisory and managerial salaries. sunken cost 1. Which of the above pieces of information are not relevant cash flows? 2. The initial investment (i.e., the year 0 cash flow) that should be used to compute the NPV of this project is - 28,100,000 PV -100,000 20,000,000 3. The incremental operating net cash flow in year 1-9 is 000,000 1,000,000 15 mill x 80% = 12 mill -9 mill = 3 million 4. The incremental total (operating + non-operating) cash flow in year 10 is 2,420,000 3+1 EA 5. What is the NPV of this project and will you accept this project or not? 12~ 9 m 3-1.7 1.3-0.2=1.1~