Question
Company AAA is considering a new project. They have paid a market research firm $5,000 to evaluate viability of the potential investment. The company is
Company AAA is considering a new project. They have paid a market research firm $5,000 to evaluate viability of the potential investment. The company is expected to sell 80,000 units at $3 each, operating expenses equal to 35% of sales, and fixed cost equal to $30,000 every year. The plan for the company is to operate for 4 years. The company also needs to build its inventory, which requires an upfront investment of $8,000. To start its operations, the company bought today new equipment worth of $160,000, which will depreciate straight line over the next 4 years. At the end of the investment horizon you will be able to sell these assets for $20,000. Assume the tax rate is 20%, and that projects with similar risk have a required return (i.e., discount rate) of 10%. (SHOW YOUR WORK. Correct answers with no formulas/calculations receive no credit) a) Find the Operating Cash Flows for each year (show your work/calculations). b) Find the change in net working capital (NWC) for each year (show your work/calculations). c) Find Net Capital Spending (NCS) for each year, and the after tax cash flow from the sale of assets in year 4 (show your work/calculations). d) Find the CFFA for each year (show your work/calculations). e) Find the NPV of this project. (show your work/calculations). f) Find the IRR of the project. (show your work/calculations). g) Should you invest in the project and why?
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