Denon is planning to introduce a new DVD player. It seeks your advice on whether this project should be taken up.

The initial investment in plant and machinery is $6 million.

The revenues from the Blu-Ray DVD player are expected to start in one year and be $10 million, $11 million, and $12 million in the first 3 years. The sales of its existing DVD player are expected to be lower by $1 million in each of these years on account of the introduction of the Blu-Ray DVD player.

The project also requires an initial increase in net working capital of $1 million immediately, which will be recouped entirely when the project is sold off at the end of year 3.

Variable costs are expected to be 60% of sales. Fixed costs are expected to be $1 million each year from year 1 to year 3.

For simplicity, assume straight-line depreciation where all assets have a life of 3 years.

The firm expects to sell off the assets after 3 years for $2 million. The capital gains tax rate is 15%.

The corporate tax rate is 35% and the appropriate discount rate for this project is 10%.

1. Answer the following:

a. What is the net cash flow from the sale of the plant and machinery in 3 years?

b. What is the free cash flow from the project in Year 0?

c. What is the free cash flow from the project in Year 1

d. What is the projects NPV?

e. What would happen to the projects NPV if the discount rate was lowered to 8%?