Scenario

Your CEO has asked you to evaluate launching a new product line for your company. Based on your experience and knowledge of the market, you have estimated the following results for the first five $(5)$ years of the Project.

$$ Expected revenues: Year $\text{'}000$s

$$80\mathrm{.}00$ $$120\mathrm{.}00$ $$200\mathrm{.}00$ $$340\mathrm{.}00$ $$460\mathrm{.}00$

$$ The Company yearly purchases $($COGS$)$ from suppliers $=50\%$ of the forecasted sales.

$$ General and administrative expenses $($wages$,$ taxes, office etc.$)$ are estimated at $15\%$ of sales.

$$ Sales salaries and commissions are estimated to be $10\%$ of sales.

$$ The Project requires and initial equipment investment of $$150.$

$$ Annual depreciation expense of the equipment is $$30.$

$$ Annual interest expense on the money borrowed to pay for the equipment is $$6.$

$$ The company tax rate is $35\%.$

$1.$ Question #$1(10$ marks$)$

$$ Using the above projections and the template in Appendix A build a Pro$-$forma Income Statement for each year of the Project.

$$ In the template below the Income Statement calculate the Operating Cash Flows and Total Cash Flows for each year.

$2.$ Question #$2(10$ marks$)$

Using your initial investment and Total Cash Flows from Question #$1$ calculate the following for the Project.

a$.$ Net Present Value

b$.$ Payback $($Breakeven$)$

c$.$ Discounted Payback $($Breakeven$)$

d$.$ Internal Rate of Return

e$.$ Profitability Index

The company can borrow at $5\%$ for the initial purchase of the equipment. Appendix A $$ Proforma Income Statement Year $(000$s$)$

$012345$ Revenues

COGS

Gross Profit

Expenses

Sales Salaries & Commissions

General & Admin Expenses

Depreciation Expense

Total Operating Expenses EBIT

Interest

EBT

Less Taxes $(35\%)$

Net Income

Operating Cash Flow

Initial Investment

Total Cash Flows