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CH12 A project requires $2,000,000 of fixed capital investment and $150,000 of working capital investment. The project is expected to last five years and generate
CH12
A project requires $2,000,000 of fixed capital investment and $150,000 of working capital investment. The project is expected to last five years and generate revenues and costs as follows:
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Fixed capital investment | -2,000,000 | |||||
Working capital investment | -150,000 | |||||
Unit sales | 400,000 | 380,000 | 360,000 | 340,000 | 320,000 | |
Sales price | 20 | 20 | 20 | 20 | 20 | |
Unit variable cost of sale | 8 | 8 | 8 | 8 | 8 | |
Fixed oper. cost exclud. depreciation | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 | |
Salvage value of fixed capital | 300,000 | |||||
Salvage value of working capital | 150,000 | |||||
Tax rate | 15% | 15% | 15% | 15% | 15% | |
Straight-line depreciation | 20% | 20% | 20% | 20% | 20% |
Complete the following table to estimate the free cash flow. Use only numbers, no commas.
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Sales revenue | 0 | |||||
The variable cost of sales | 0 | |||||
Gross profit | 0 | |||||
Less op. cost ex. dep. | 200000 | 200000 | 200000 | 200000 | 200000 | |
Depreciation | 400000 | |||||
EBIT | ||||||
Tax | 522000 | 486000 | ||||
EBIT(1-T) | 3570000 | 2754000 | ||||
EBIT(1-T) + depreciation | 3970000 | 3154000 | ||||
Salvage value of fixed capital | 300000 | |||||
tax on salvage value | ||||||
after-tax salvage value | ||||||
Recovery of working capital | 150000 | |||||
Projected free cash flow | -2150000 | 3766000 |
Assume that the cost of capital is 8%. What are the projected NPV, IRR, and Payback periods?
NPV =
IRR = %
Payback =
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