Part 2

You arrive to the office and begin reviewing a new project for solar-powered widgets. Compute the NPV, IRR, PI, and cash flows for the following project:

The firm is considering expanding into a new product line of solar-powered widgets. It is estimated that the firm will sell 100,000 solar-powered widgets per year for the next 10 years and that the widgets will sell for $75 each. The appropriate WACC is 12%.

Variable costs	$25 each
Annual fixed costs	$1,500,000
Initial robot production expenditure	$10,000,000 At the end of the project the value is $0. The robots are recycled and are not sold for cash.
Robot depreciation	straight-line method for 10 years, no residual value
Change in net working capital investment	One-time $500,000 initial investment in inventory to be recovered at the end of the project in 10 years
Marginal tax rate	25%

1. Question: The IRR of the project is:

A. 9.32%

B. 25.13%

C.19.22%

D.13.38%

Variable costs	$25 each
Annual fixed costs	$1,500,000
Initial robot production expenditure	$10,000,000 At the end of the project the value is $0. The robots are recycled and are not sold for cash.
Robot depreciation	straight-line method for 10 years, no residual value
Change in net working capital investment	One-time $500,000 initial investment in inventory to be recovered at the end of the project in 10 years
Marginal tax rate	25%

2. Question: The initial cash outlay in year 0 is:

A) 250,000

B) -10,000,000

C) -10,250,000

D) -9,750,000

Variable costs	$25 each
Annual fixed costs	$1,500,000
Initial robot production expenditure	$10,000,000 At the end of the project the value is $0. The robots are recycled and are not sold for cash.
Robot depreciation	straight-line method for 10 years, no residual value
Change in net working capital investment	One-time $500,000 initial investment in inventory to be recovered at the end of the project in 10 years
Marginal tax rate	25%

3. Question: The Profitability Index (PI) of the project is:

A) .59

B) 1.68

C) .41

D) 1.59

4) Question: The terminal cash flows for year 10 is:

A) 3,125,000

B) 2,875,000

C) 10,250,000

D) 13,125,000

5) Question: The annual net cash flows for years 1-9 are:

A) 1,875,000

B) 2,375,000

C) 2,875,000

D) 937,500

6) Question: NPV of the project is:

A. +5,130,045

B. +6,074,885

C. -6,075,003

D. -1,237,800