Consider an order delivery business that will be a 5-year project. The required net working capital is $6.6 million and it will be returned at the end of the life of the project. Required equipment (net capital spending) will cost $15 million and it will be depreciated straight-line to 0 over the 5-year life of the project. The business will have sales of $3 million in year 1, $6 million in year 2 and $10 million in years 3, 4, and 5. Costs are 30% of sales and the tax rate is 20%. (If there is a loss at the EBIT line, assign taxes of 0 for that year and do not carry tax losses forward.) The equipment has no salvage value.

a. Create an income statement for years 1, 2, and 3, 4, and 5 (3, 4 and 5 will have the same income statement).

b. Use the information from the income statement to calculate the operating cash flow using EBIT + depreciation taxes for each year.

c. Put all cash flows (net working capital, net capital spending, and operating cash flows) on a timeline.

d. Using total cash flows from part c, Calculate the payback period.

e. Calculate the IRR.

f. Calculate the NPV using a 13% discount rate.

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