Management are considering a project to buy and operate a major item of equipment. Your boss is extremely enthusiastic about the project, arguing that

• (i) it has a very high rate of return and acceptable payback period, and
• (ii) it will definitely add to shareholder value. The equipment costs $345,000, is anticipated to be sold at the end of year 5 for $35,000, and will be depreciated straight line over the five-year period. The equipment will be used to manufacture a new type of electrical switch which will be sold at a price of $3.55 per unit. Expenses associated with this project other than depreciation can be assumed to be 56% of the sales revenue. The relevant discount rate is 11.5% and can be assumed to be the hurdle rate for both the accounting rate of return and the internal rate of return. The sales forecast is given by the following table:

Year | Sales (units)

1. 136,000
2. 247,000
3. 358,000
4. 469,000
5. 580,000

1. Calculate the projected yearly profit and operating cash flows. Ensure that your measure of profit is relevant for any appraisal measure as discussed in the lectures/textbook. Present your analysis in the table in section 1, Part B of the template.
2. Table showing ALL the project's net cash flows, excluding working capital requirements. Present your analysis in the table in section 2, Part B of the template.
3. Calculate the accounting rate of return, and show your answer as a percentage with 2 decimal places (e.g. 12.34%)
4. Table of cumulative cash flows suitable for calculating the payback period, and calculate the payback period
5. What can you conclude about the project and about the statements made by your boss, based solely on the project's ARR and payback period? Enter your response in template section 5, Part B.
6. Table of cash flows , discount factors and present values as relevant for calculation of the net present value (NPV), and calculate the project's NPV
7. Calculate the project's internal rate of return (IRR), and show your answer as a percentage with 2 decimal places (e.g. 12.34%)
8. Assume that customers take one month to pay, the project requires inventory of $15,000 to be held, that accounts payable attributable to the project has a permanent balance of $10,000, and that working capital requirements are in place at the start of each year. Table to show the effect of these considerations on the project's cash flows
9. Comment, in general terms, about how working capital requirements affect the cash flows and the NPV of the project
10. Based on your analysis, what are your recommendations regarding this project? Do you agree with the comments made by your boss? Why or why not?