(Comprehensive problem) The Shome Corporation, a firm in the 33 percent marginal tax bracket with a required rate of return or cost of capital of 18 percent, is considering a new project. The project involves the introduction of a new product. This project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. Given the following information, determine the free cash flows associated with the project, the project's net present value, the profitability index, and the internal rate of return. Apply the appropriate decision criteria. a. What is the initial outlay associated with this project? Data Table $ (Round to the nearest dollar.) Cost of new plant and equipment Shipping and installation costs Unit sales $6,300,000 $ 180,000 YEAR 1 2 3 4 5 UNITS SOLD 75,000 110,000 130,000 65,000 65,000 Sales price per unit Variable cost per unit Annual fixed costs Working-capital requirements $250/unit in years 1 through 4, $200/unit in year 5 $120/unit $200,000 per year in years 1-5 There will be an initial working-capital requirement of $80,000 just to get production started. For each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. Use the simplified straight-line method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years. Depreciation method (Comprehensive problem) The Shome Corporation, a firm in the 33 percent marginal tax bracket with a required rate of return or cost of capital of 18 percent, is considering a new project. The project involves the introduction of a new product. This project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. Given the following information, determine the free cash flows associated with the project, the project's net present value, the profitability index, and the internal rate of return. Apply the appropriate decision criteria. a. What is the initial outlay associated with this project? Data Table $ (Round to the nearest dollar.) Cost of new plant and equipment Shipping and installation costs Unit sales $6,300,000 $ 180,000 YEAR 1 2 3 4 5 UNITS SOLD 75,000 110,000 130,000 65,000 65,000 Sales price per unit Variable cost per unit Annual fixed costs Working-capital requirements $250/unit in years 1 through 4, $200/unit in year 5 $120/unit $200,000 per year in years 1-5 There will be an initial working-capital requirement of $80,000 just to get production started. For each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. Use the simplified straight-line method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years. Depreciation method
