Chapter $11$

Exercises from the book $($adjusted$)$

$11-13.$Traid Winds Corporation, a firm in the $21$ percent $$marginal tax

bracket, with a $15$ percent required rate of return or cost of $$capital$,$ is considering a new project.

This project involves the introduction of a new $$product$.$ The project is expected to last $5$ years and then,

because this is somewhat of a fad product, be terminated.

Cost of new production equipment $$14,800,000$

Shipping and installation costs $$200,000$

Unit sales YEAR UNITS SOLD

$170,000$

$2120,000$

$3120,000$

$480,000$

$570,000$

Sales price per unit $$300/$unit in years $1$ through $4,$ $$250/$unit in year $5$

Variable cost per unit $$140/$unit

Annual fixed costs $$700,000$ per year in years $15$

Working$-$capital The working capital has to be increased by $$800,000$ at the start of the project

requirements All working capital is liquidated at the termination of the project at

the end of year $5.$

Depreciation method Straight Line depreciation method, over $5$ years.

If any losses occur, they would be offset by profits in other areas of the company.

Questions

a$)$ Construct Operating Cash Flows

b$)$ Construct Investment Cash Flows

c$)$ Calculate the Free Cash Flows

d$)$ Evaluate the project, using the NPV method