NPV and capital budgeting

Y Sports Company is considering to launch the production of new running shoes. The company believes they can sell 125,000 units at $400 each in the first year and then unit sales to grow by 3% in the Year 2, 2.5% in the Year 3, 1.0% in the Year 4 and no growth thereafter. Variable costs are estimated to be $250 per unit, while the fixed costs are $8.0 million a year. The project life is expected to be six years and the unit price and fixed costs will remain unchanged throughout the project life.

Further, the company expects the project would require $20.0 million of the total investment in manufacturing equipment. The equipment will be depreciated over eight years on a straight-line method with the salvage value of $2.0 million and is expected to be sold at 80% of the book value at the end of the project. The initial net working capital is estimated to be $11.5 million and then grows to 25% of sales. Corporate income tax is 35%.

(1) Prepare a proforma income statement for each year from Year 1 through year 6.

(2) Project cash flows from this venture through Year 0 through Year 6.

(3) Should the company launch this venture at the cost of capital of 15%?

(4) Find the IRR of this project up to the second decimal places.