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) NOTE: You can show your Excel table in the box below for partial credit, but you are still expected to write your answers and your calculations in the boxes below parts (a)-(g). 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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