MUST SUBMIT FORMULAS TOO

Mark is expanding a new product to help with in the construction market. His marketing manager thinks the company can sell 120,000 units per year at a price of $3.75 each for 3 years, after which the product will be obsolete. The purchase price of the required equipment, including shipping and installation costs, is $150,000, and the equipment is eligible for 100% bonus depreciation at the time of purchase. Current assets (receivables and inventories) would increase by $45,000, while curent liabilities (accounts payable and accruals) would rise by $20,000. Variable cost per unit is $1.95, and fixed costs would be $70,000 per year. When production ceases after 3 years, the equipment should have a market value of $15,000.Marks tax rate is 25%, and it uses a 10% WACC for a. Find the required Year 0 investment outlay after bonus depreciation is considered and the project's annual cash flows.

Then calculate the project's NPV, IRR, MIRR, and payback. Assume at this point that the project is of average risk.

Key Output: NPV =

IRR =

MIRR =

Part 1. Key Input Data

Equipment cost plus installation $150,000 Market value of equipment after 3 yrs $15,000

Increase in current assets $45,000 Tax rate 25%

Increase in current liabilities $20,000 WACC 10%

Unit sales 115,000

Sales price per unit $3.75

Variable cost per unit 60%

Variable cost per unit (in dollars) $1.95

Fixed costs $70,000

Part 2. After-Tax Salvage Value at end of Year 3 Equipment

Estimated Market Value

Book Value

Expected Gain or Loss

Taxes paid or tax credit

After-tax salvage value

Part 3. Project Cash Flow Analysis

0123

Investment Outlays at Time =0

CAPEX = Equipment = Cost (1 T)

Increase in NOWC

Operating Cash Flows over the Project's Life

Units sold

Sales price

Sales revenues

Variable costs

Fixed operating costs

Depreciation: 100% Bonus Depreciation in Year 0

EBIT (Operating income)

Taxes on operating income (25%)

EBIT (1 T)= After-tax operating income

Add back depreciation

EBIT (1 T)+ Depreciation

Terminal Cash Flows at Time =3

Salvage value

Tax on salvage value

After-tax salvage value

Recovery of net operating working capital

Project FCFs = EBIT (1 T)+ DEP CAPEX \Delta NOWC

Part 4. Key Output: Evaluation of the Proposed Project

Net Present Value (at 10%)

IRR

MIRR-risk projects

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