D46 X f A C 1 Problem 425 points) 2 3 Sinic. produces and sells are products in South Carolina it wants to evaluate a new project with the following characteristics 5 6 Cost of new production equipment 5.0800,000 7 Shipping and installation costs $100,000 9 Unit sales year Uits produced and sold 10 110,000 11 2 150,000 12 3 160,000 13 4 130,000 14 Sales price per unit $30/unit in years 1 and 2, 327/unit in years 3 and 4 15 Variable cost per unit $10/unit in years through 3,511/unit in year 4 16 Annual fixed costs 5200,000 per year in years | 17 Working capital requirements TB There will be an initial working capital requirement of $150,000 just to get production started 19 For each year, the total investment in net working capital will be equal to 8 percent of the dollar value of sales for that year 20 Thus, the investment in working capital will increase in the first years, and decrease in the later years 21 Finally, all working capital in liquidated at the termination of the project at the end of year 22 Depreciation method 23 Bomun depreciation method, and as a result the bonus depreciation of $4 5 million occur in year 1 with no depreciation in any other years 24 25 The company is in the 21% marginal tax bracket and has a 12% required rate of retum for cost of capital). 26 27 Questions: 28 ) Construct the Free Cash Flows (20 points) 29 b) Evaluate the project with the NPV method and five your advice. (5 points) 30 31 32 33 D46 X f A C 1 Problem 425 points) 2 3 Sinic. produces and sells are products in South Carolina it wants to evaluate a new project with the following characteristics 5 6 Cost of new production equipment 5.0800,000 7 Shipping and installation costs $100,000 9 Unit sales year Uits produced and sold 10 110,000 11 2 150,000 12 3 160,000 13 4 130,000 14 Sales price per unit $30/unit in years 1 and 2, 327/unit in years 3 and 4 15 Variable cost per unit $10/unit in years through 3,511/unit in year 4 16 Annual fixed costs 5200,000 per year in years | 17 Working capital requirements TB There will be an initial working capital requirement of $150,000 just to get production started 19 For each year, the total investment in net working capital will be equal to 8 percent of the dollar value of sales for that year 20 Thus, the investment in working capital will increase in the first years, and decrease in the later years 21 Finally, all working capital in liquidated at the termination of the project at the end of year 22 Depreciation method 23 Bomun depreciation method, and as a result the bonus depreciation of $4 5 million occur in year 1 with no depreciation in any other years 24 25 The company is in the 21% marginal tax bracket and has a 12% required rate of retum for cost of capital). 26 27 Questions: 28 ) Construct the Free Cash Flows (20 points) 29 b) Evaluate the project with the NPV method and five your advice. (5 points) 30 31 32 33
