Question
Confused on this assignment. Any help is appreciated. Thank you A firm is planning a new project: (1) This project costs $1,400,000 to purchase fixed
Confused on this assignment. Any help is appreciated. Thank you
A firm is planning a new project:
(1) This project costs $1,400,000 to purchase fixed assets, and $50,000 for shipping & installation fee.
(2) The life of this project is 5 years. The salvage value of fixed assets is 20% of the gross fixed assets (including shipping & installation fee).
(3) The working capital needed is $35,000 in 2017, and it is expected to increase 4% each year thereafter.
(4) This project can produce 180,000 units in 2017, and the production is expected to grow 5% each year. The current unit price is $7, and the cost of each unit is $4.5.
(5) The inflation rate is 2.2% each year. The firm will adjust both the unit price and the variable cost of each unit based on the inflation rate.
(6) The firm uses the 5-year straight-line depreciation policy for its fixed assets, and it is in the 28% tax bracket.
(7) The cost of capital for the firm is 10%.
A) Calculate the initial outlay, annual after-tax cash flows, and terminal cash flow for this project.
B) Calculate the payback period, discounted payback period, NPV, PI, IRR, and MIRR.
C) Perform sensitivity analysis of the effects of cost of capital on the projects NPV.
D) Scenario analysis of the combined effects of the following three variables on payback, discounted payback, NPV, IRR, and MIRR.
Scenario | Production | Unit Price | Unit Cost |
Best Case | 250,000 | $9 | $4 |
Expected Case | 180,000 | $7 | $4.5 |
Worst Case | 120,000 | $6 | $5 |
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