Problem 1 - (RIC), a large Nashville-based technology company is evaluating a new project to manufacture a new chip. a. The projects estimated economic life is 5 years. b. RICs marketing vice-president believes that annual sales would be 30,000 units if the units were priced at $6,000 each. RIC expects no growth in unit sales, and it believes that the unit price will rise by 3 percent each year. c. The engineering department has reported that the project will require additional manufacturing space, and RIC currently has an option to purchase an existing building, at a cost of $20 million, which would meet this need. The building would be bought and paid for on December 31 of Year 0, and for depreciation purposes, it would fall into the MACRS 39- year class. The annual depreciation rate for the five years of economic life of the project would be:

Evaluating a New Project Year 0

Year 1 Year 2 Year 3 Year 4 Year 5 Project- 5 Year Life Building Purchase 20,000,000 Equipment Purchase 10,000,000 Total Initial Investment $30,000,000

Unit Sales ?? ?? ?? ?? Price per Unit ?? ?? ?? ?? ?? Total Sales ?? ?? ?? ?? ?? Variable Cost per Unit ?? ?? ?? ?? ?? Total Variable Costs ?? ?? ?? ?? ?? Total Fixed Costs ?? ?? ?? ?? ?? Depreciation Rate (39 Year) ?? ?? ?? ?? ?? Building Depreciation ?? ?? ?? ?? ?? Depreciation Rate (5 Year) ?? ?? ?? ?? ?? Equipment Depreciation ?? ?? ?? ?? ?? Total Depreciation Costs ?? ?? ?? ?? ?? Earnings Before Income Tax (EBIT) ?? ?? ?? ?? ?? Tax Rate ?? ?? ?? ?? ?? Total Taxes ?? ?? ?? ?? ?? Net Operating Profits (NOPAT) ?? ?? ?? ?? ?? Add Back Depreciation ?? ?? ?? ?? ?? Operating Cash Flow ?? ?? ?? ?? ?? NOWC Percentage Required ?? ?? ?? ?? ?? ?? Net Operating Working Capital ?? ?? ?? ?? ?? ?? Increase in NOWC ?? ?? ?? ?? ?? ?? Total Annual Project Cash Flow ?? ?? ?? ?? ?? ?? Terminal Year Cash Flow Building Sale (MV) ?? Less: Book Value of Building ?? Profit on Sale ?? Tax on Loss (25%) ?? Net Salvage Value on Building ?? Equipment Sale (MV) ?? Less: Book Value of Equipment ?? Profit on Sale ?? Tax on Profit (25%) ?? Net Salvage Value on Equipment ?? Total Net Salvage Value ?? Free Cash Flow ?? ?? ?? ?? ?? ?? Required Rate of Return (WACC) ?? NPV ?? IRR ??