(Related to Checkpoint 12.1)(Comprehensive

problemcalculating

project cash flows, NPV, PI, and IRR)Traid WindsCorporation, a firm in the

33

percent marginal tax bracket with a required rate of return or discount rate of

13

percent, is considering a new project. This project involves the introduction of a new product. The project is expected to last

5

years andthen, because this is somewhat of a fad product, it will be terminated. Given the following information,

, determine the free cash flows associated with the project, the project's net present value, the profitability index, and the internal rate of return. Apply the appropriate decision criteria.

a.Determine the free cash flows associated with the project.

The FCF in year 0 is

(Round to the nearest dollar.)

Cost of new plant and equipment:	$14,400,000
Shipping and installation costs:	$220,000
Unit sales:
	Year	Units Sold
	1	65,000
	2	110,000
	3	110,000
	4	75,000
	5	65,000
Sales price per unit:	$290/unit in years 1 through 4, $240/unit in year 5
Variable cost per unit:	$180/unit
Annual fixed costs:	$800,000
Working-capital requirements:	There will be an initial working capital requirement of $190,000 to get production started. For each year, the total investment in net working capital will be equal to 11 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5.
The depreciation method:	Use the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 years.