CSM, Inc., is considering an investment in Earthilizer, a new organic fertilizer made from dairy farm waste

Developed by CSMs ag-division over the past 3 years in response to: Growing demand from organic farmers and more restrictions on the disposal of cattle manure

Project will be up and running by the end of 2007, with first year of sales in 2008

CSM financed from internally generated cash flows; firm is unlevered. Very promising investment opportunity. Product has undergone extensive testing. Product is wholly organic, and is cheaper than traditional applications

Sales $1 million in 2008. Growing 10% annually throughout the 5-year planning period

Operating Costs: COGS 67.40% of sales. Operating expenses before depreciation are 10% of sales (variable expenses) plus an annual fixed expense of $115K

Straight-line depreciation: PPE 10-year life and zero salvage value

30% tax rate

NWC of $250 K at 2007 year-end

2008 - 2012 NWC requirements = 25% of Earthilizers sales in the year

CAPEX $330K in 2007 (Zero in all future years)

Project end = 2012 (Salvage value = book value in 2012)

Estimate the (free) cash flows of the project and the NPV/IRR of the project if the appropriate discount rate is 13.25%