PART 1: Please answer and upload Section a) and b) question as Excel document and answer Section c), d) and e) on your Answer Sheet.

1-You are Manager of the Kumar Campany and working on the campanys Capital Structure.

The Kumar Corpotation, a firm in the 34% marginal taxbracket with a 15% required rate of return or cost of capital, is considering a new project. This project involves the introduction of a new product. The project is expected to last five years and then, because this is somewhat of a fad project, to be terminated.

• Cost of new plant and equipment: $ 9,900,000

• Shipping and installation cost: $ 100,000

• Unit Sales: Year Unit sold

1 8,000

2 10,000

3 15,500

4 9,500

5 9,500

• Sales price per unit: $350 / unit in years 1 and 2, $300 / unit in year 3,4 and 5

• Variable cost per unit: $50 / unit

• Annual fixed costs: $ 200,000

• Working Capital Requirement: There will be an initial working capital requirement of $ 100,000 just to get production started. Then, for each year , the total investment in NWC will be equal to 10% of the dollar value of sales for that year. Finally, 90 percent of the working capital is liquidated at the termination of the project at the end of year 5.

• The Depretiation Method: We used the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 years.

• Interest Expenses: There will be an interest payment of $100,000 every year for five years.

1. Given the following information, Use Excel Programa and determine the free cash flows associated with the project.

2. Use Excel Program and calculate NPV (Net Present Value) and the IRR (Internal Rate of Return).

3. According to your NPV and IRR result in section b), as a Financial Manager, do you accept or reject the preoject? Why?

4. Use calculator to find the NPV ? Do you accept the project? Explain your result.

5. Use Payback Period ? Do you accept the project? Explain your result.