D Question 18 10 pts Enterprise MAXIMILIEN considers investing in project FLUX. The duration of the project is 3 years. For this project an initial investment (at t=0) in machines (fixed assets) of 7 million is required. This investment is depreciated linearly (straight-line) in three years to 1 million. The annual depreciation expenses are 2 million. The project is expected to last until the end of year 3 and the fixed assets are then (at t=3) expected to be sold for 1 million. In addition to the investment in fixed assets, also an investment in working capital is required. The working capital exists of inventories, accounts receivables and accounts payables. The project does not involve interest-bearing liabilities. The cost of capital are 10%, the corporate tax rate is 20%. For this project FLUX the expected income statements and expected size of the working capital components for the end of years 1.2 and 3 are presented in Table 1. Table 1: Expected income statements and size of inventories, accounts payables and receivables at the year's end. Income Statement Sales Costs of Goods Sold Depreciation Operating Profit before Tax Tas on Operating Profit Operating Profit after Tax 1 5,500,000 3,300,000 2,000,000 200,000 40,000 160,000 2 8,000,000 4,800.000 2.000.000 1,200,000 240.000 960,000 6,000,000 3,600,000 2,000,000 400,000 80,000 320,000 Eaming Machine Sale (divestment fixed assets) Book value machine Resut on divestment Tat Result on divestment after tax 1,000,000 1,000,000 0 0 Total xofit after tas 160,000 960.000 320,000 Size of working capital Loverstories Accounts receivables Accounts payables Working Capital 350.000 120.000 230,000 400.000 550.000 80,000 870,000 500.000 800.000 100 000 1.200,000 0 EO EO 01 A. Calculate the quick ratio at t=1. Show your calculation. (2 points) B. Calculate the total free cash flows from operations at t=3. No need to report your calculation (2 points) C. Calculate the profitability index of the project. No need to report your calculation. Round your answer to 2 decimals! (2 points) D. Is the net present value (NPV) of this project positive or negative? Explain your answer based on the answer from question c. You can make an assumption if you were unable to solve question c. Calculations are not necessary (2 points) When determining the total cash flow, working capital needs to be taken into account. E. Suppose that enterprise Maximilien is able to reduce working capital with 50% from t=1 onwards. What will the influence on the NPV of this project be? Will it decrease, increase or remain the same. Explain your answer. Providing a calculation is not necessary. (2 points)
