Project Evaluation & Capital Investment

Volume: 52,000 units --- 57,000 units --- 61,000 units

Price: $4.50 per unit --- $4.25 per unit --- $3.85 per unit

Marginal Cost: $3.25 per unit --- $2.50 per unit --- $2.20 per unit

Expected Life of Project: 3 years

Fixed Costs: $14,000 per year

Capital requirement: $100,000 (90% depreciated over the 3-year span)

Market value of equipment in 3 years: $10,000

Charge to Net Working Capital: $30,000 (at t = 0, then recapture at t = 3)

Tax rate: 34%

Risk free rate (3-year): 2.5%

Total Market Return: 9.95%

Project Beta: 2.30

Project Debt/Equity Structure: 0.70

Cost of Debt (pretax): 5.5%

FIND:

Project Cash Flow (Use Cash Flow From Assets [CFFA]) in Year 1

Project Cash Flow (Use Cash Flow From Assets [CFFA]) in Year 2

Project Cash Flow (Use Cash Flow From Assets [CFFA]) in Year 3

Cost of Equity Capital

Project Discount Rate (Hurdle Rate Use WACC at estimated capital structure))

NPV

IRR

Payback Period

Discounted Payback Period

Average Accounting Return

Profitability Index

Do you take this project?