Q:

Capital Budgeting Problem
Kraemer Compnay is launching a new product. The following information relates to the launch:
1) 4 year project life					8) Sales for first year			$ 200,000
2) New equipment cost			$ (200,000)		9) Sales increase per year			5%
3) Equipment ship & install cost			$ (35,000)		10) Operating cost:			$ (120,000)
4) Related start up cost			$ (5,000)		as a percent of sales			-60%
5) Inventory increase			$ 25,000		11) Depreciation expense			$ (60,000)
6) Accounts Payable increase			$ 5,000		12) Tax rate			-40%
7) Equip. salvage value after tax			$ 15,000		13) WACC			10%
Calculate NPV, IRR and Pay-back?
Cash Flow Framework:
Year			0	1	2	3	4
Investments:
1) Equipment cost
2) Shipping and Install cost
3) Start up expenses
4) Change in Net Working Capital
Total Initial Cost			XXXXXXXX
Operations:
Revenue				$ 200,000		$ -	$ -
Operating Cost				$ (120,000)	$ -	$ -	$ -
Depreciation				$ (60,000)
EBIT					$ -	$ -
Taxes				$ -	$ -	$ -	$ -
Net Income				$ -	$ -	$ -	$ -
Add back - Depreciation				$	$ -	$ -	$ -
Total				$ -	$ -	$ -	$
Terminal:
1) Change in net WC OR		Release of WC					XXXXXXX
2) Salvage value (after tax)							XXXXXXX
Total Terminal Cash Flows							XXXXXXX
Total Cash Flows			$ -	$ -	$ -	$ -	$ -
NPV = ?			IRR =	?		Payback=		?
How would you explain to your CEO (in business terms) what NPV means?
What are the advantages and disadvantages of using NPV versus IRR?