Lous Corporation decided to go into business publishing Corporate Finance Textbooks. It would cost $250,000 (at year 0) to purchase the necessary equipment for textbook production. The project would require a net working capital of at the beginning of each year in amount equal to 6% of the year's projected sales.

The firm believes it could sell 2,500 units per year. Each texbook would sell for $115 per unit, and BA220-04 Corp believes that variable costs would amount to $25 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 3.5%. The companys non-variable costs would be $55,000 at Year 1 and also would increase at the 3.5% inflation rate.

The textbook project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. The equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market value of the equipment at the end of the projects 4-year life is $25,000.

It is important to note that Lous Corp's tax rate is 20% and its cost of capital is 12% for average-risk projects.

INPUT DATA Equipment cost Net operating working capital/Sales First year sales (in units) Sales price per unit Variable cost per unit (excl. depr.) Nonvariable costs (excl. depr.) Inflation in prices and costs Estimated salvage value at year 4 Depreciation years Depreciation rates Tax rate WACC for average-risk projects Year 1 Year 2 Year 3 Year 4 32.00% 19.20% 11.52% 20.00% 0 1 2 3 4 Intermediate Calculations Units sold Sales price per unit (excl. depr.) Variable costs per unit (excl. depr.) Nonvariable costs (excl. depr.) Sales revenue Required level of net operating working capital Basis for depreciation Annual equipment depr. rate Annual depreciation expense Ending Bk Val: Cost - Accum Depirn Salvage value Profit (or loss) on salvage Tax on profit (or loss) Net cash flow due to salvage 20.00% 32.00% 19.20% 11.52% Years 0 1 2 3 4 Cash Flow Forecast Sales revenue Variable costs Nonvariable operating costs Depreciation (equipment) Oper. income before taxes (EBIT) Taxes on operating income Net operating profit after taxes Add back depreciation Equipment purchases Cash flow due to change in NOWC Net cash flow due to salvage Net Cash Flow (Time line of cash flows) 0 1 2 3 4 Cash Flow Forecast Sales revenue Variable costs Nonvariable operating costs Depreciation (equipment) Oper. income before taxes (EBIT) Taxes on operating income Net operating profit after taxes Add back depreciation Equipment purchases Cash flow due to change in NOWC Net cash flow due to salvage Net Cash Flow (Time line of cash flows) Data for Payback Years Years 0 1 2 3 4 Net cash flow Cumulative CF Part of year required for payback = Data for Discounted Payback Years Years 2 0 1 3 4 Net cash flow Discounted cash flow Cumulative CF Part of year required for discounted payback Key Results: Appraisal of the Proposed Project Net Present Value (at 12%) = IRR = MIRR = Payback = Discounted Payback =