FINC3131 Project 5

Group number:

You are financial managers of a company that produces printers. You will use NPV method to evaluate a 10-year project that produce and sell a new model. The WACC is 5% and the tax rate is 21%. You have to show intermediate steps to earn the credit.

The proiect needs a set of machines that costs $5 million. The company uses a 10-year straight-line depreciation method so that 100% of fixed assets will be depreciated by year

10. There is no salvage value of the fixed asset.

• In the past two years, the company had spent $800,000 in R&D to develop the new model
• The project will be partially financed with debt, and the interest to be paid every year would be $200,000.
• If the new project is taken, it is expected that the investments in inventory will increase by $1,500,000, account receivable will increase by $1 million, account payable increases by $600,000, accruals increases by $100,000, and the minimum cash balance will increase by $0.5 million. Suppose these changes will reverse at the end of the project. " The net sales from this project will be $8 million per year, of which 20 percent will be from the lost sales of existing products. The costs of the production will be 45% of the net sales.

" The project will require hiring a new manager, who will cost $100,000 per year. In

addition, the firm needs to rent a new office for $50,000 a year.

Currently, the overhead of the firm is $500,000. And the accounting department will allocate 20% of this amount to the new project.

Question 1: How much is the initial investment at t-0?