In the spring of 2015, Jemison Electric was consider-ing an investment in a new distribution center. Jemisons CFO anticipates additional earnings before interest and taxes (EBIT) of $100,000 for the first year of operation of the center, and, over the next five years, the firm estimates that this amount will grow at a rate of 5% per year. The distribution center will require an initial investment of $400,000 that will be depreciated over a five-year period toward a zero salvage value using straight-line depreciation of $80,000 per year. Jemisons CFO estimates that the distribution center will need operating net working capital equal to 20% of EBIT to support operation. Assuming the firm faces a 30% tax rate, calculate the projects annual project free cash flows (FCFs) for each of the next five years where the salvage value of operating network-ing capital and fixed assets is assumed to equal their book values, respectively.

1. If the discount rate is 18%, what is the NPV of this project? What is the IRR?
2. Conduct a break-even sensitivity analysis and identify the top 3 value drivers

Growth rate in EBIT for years 1-5 EBIT (year 1) CAPEX for year 0 Depreciable life of fixed assets Tax rate New working capital for years 1-5 Given 5% $ 100,000 $ 400,000 5 years 30% 20% of EBIT Solution Year 0 $ 1 2 100,000 $ 105,000 $ (30,000) (31,500) 70,000 $ 73,500 $ 80,000 80,000 3 110,250 $ 115,763 $ (33,075) (34,729) 77,175 $ 81,034 $ 80,000 80,000 5 121,551 (36,465) 85,085 80,000 | EBIT Taxes NOPAT Plus: Depreciation Less: CAPEX Less: Net working capital needs (See Note 1) Plus: Salvage value of the fixed assets in year 5 Firm Free Cash Flow (FFCF) (400,000) (20,000) (1,000) (1,050) (1,103) (1,158) 24,310 $ (420,000 $ 149,000 $ 152,450 $ 156,073 $ 159,876 $ 189,396 $ 400,000 $ 320,000 $ 240,000 $ 160,000 $ 80,000 Net Fixed Assets (beginning of the year) Plus: CAPEX Less: Depreciation Expense for the Year Net Fixed Assets (end of the year) 400,000 (80.000) $ 400,000 $ (80,000) (80,000) (80.000) 320,000 $ 240,000 $ 160,000 $ (80.000) 80,000 $ 18.00% Discount Rate NPV IRR Break Even Analysis variable Expected Value Critical Value % of Change Sales Growth EBIT (1) Tax Rate NWC/sales Discount Rate CAPEX for year 0