CB7-3 CAPITAL BUDGETING The management team of Falling Starz, Inc. is contemplating a capital investment in a new product. Initial cash outlays (to) are estimated at $1.98 million for plant and equipment, $100,000 for land and $400,000 as additional Net Working Capital. The life of the proposed project is estimated at 15 years with no further outlays anticipated for neither fixed assets nor Net Working Capital. Falling Starz, Inc. anticipates two phases in the project's life. Phase One will last for five years with Phase Two lasting for ten years. Forecasted income statements for each phase are as follows: Phase Two Years 6 - 15 Phase One Years 1-5 (000's) Net Sales $1,200 Less - Cost of Sales 800 Gross Profit 400 Less - Operating Expenses 175 Earnings before Interest + Tax 225 Less - Interest Expense 0 Earnings before Taxes 225 Less - Taxes at 21% Net Income $178 $2,000 1.300 700 300 400 47 400 84 $316 Plant and Equipment will be depreciated on a straight-line basis over the 15 years to a "Zero" salvage value. Land, at the end of the project's life will have an estimated market value of $100,000. Depreciation Expense is included in Operating Expenses. The required return for this investment is 12%. Required: 1) Compute the NPV for this project 2) Based on the NPV analysis, should the project be undertaken? 3) As a "best guess" estimate, what is the "intrinsic return of this project