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Time Value of Money/Capital Budgeting Homework Suppose you are CEO of a public enterprise organization (i.e. an organization that generates profit but has a public/social mission) and are considering a new project. For this project, you will have an initial outlay (investment) of \$250,000 in machinery. In your first year of operation, $300,000 will be generated in sales, and sales will grow at a rate of 10% per year for six years. Cost of goods and services (COGS) will be 60% of annual sales, and operating income equals the difference between sales and COGS. The machinery will depreciate at a rate of 13.33% per year for six years, then it will be salvaged for $50,000 in year 7 . Fixed costs for the project will be $50,000 for the first year of operation and are expected to grow by 3% per year for six years. Taxable income will be equal to operating income less fixed costs and depreciation. Taxable income will be taxed at 40% for each year in operation, and net income will equal taxable income less taxes paid. To compute the operating cash flow for each operational year, add back in the depreciation less the working capital. Working capital (i.e., the investment or liquidity needed to fund an annual operating cash flow) is 10% of sales in year 1 , but decreases to 10% of the difference between the current year's sales and the previous year's sales. In year 7, working capital will be fully recouped, and the terminal cash flow in year seven will equal salvaged machinery value plus working capital recouped. a) Calculate the project cash flows for years 0-7. b) Calculate the NPV and IRR, assuming a 15% interest rate. Salvage $50,000 Terminal Cash Flow Project Cash Flow NPV IRR