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 to zero. 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)
Find NWC, NCS, CFFA, NPV, IRR. Should you invest in the project and why?
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