FunBudget Inc is considering investing in a new

product line to complement its existing products.

The new product line is expected to have a 3-year

life. The project manager has collected the

following information for your consideration:

1. Initial investment (new equipment):

$250,000,000

2. All initial investment costs are

depreciated straight-line at a rate of 20% p.a.

3. Estimated sales revenue (per year):

$180,000,000 in year one, 220,000,000 in year two,and 160,000,000 in year three.

4. Cost of goods sold is estimated to be 40% of the

sales revenue per year.

5. Administration expenses (per year): $60,000,000

6. Working capital each year is forecasted to be

20% of sale revenue of the following year. It will be fully recouped at the end of the project life.

7. Company tax rate: 30%

Additional information:

At the end of the project the company will be able to sell the new equipment (initial investment) for

$50.000.000.

The company has just spent $500,000 in

advertisements. All cash flows are stated in

nominal terms. The manager believes a discount

rate of 12% p.a. (nominal) is appropriate for this

project. Inflation rate is 2% p.a.

c) Determine the net cash flow associated with the sale of the new equipment at the end of the project (2 marks).

d) Determine the net cash flow each year for the

project (2 marks).

e) What is the NPV of the project? Should the

company proceed with this investment? (1 mark)