Seequent Inc., is a start-up in online exploration software development and it is considering its first project. This project involves the introduction of a new software to streamline data collection in exploration and mining industry. This project is expected to last 6 years and then the product line will be terminated. The company uses the simplified straight-line method over the project timeline. It is assumed that the plant and equipment will recover salvage value, if any, at the termination of the project. This project has the following working capital requirement: There will be an initial working capital requirement of $115,532 just to get the production started. For each year, the total investment in net working capital will equal 2.5% of the dollar value of sales for the upcoming year. All working capital is liquidated at the termination of the project at the termination year of the project. Given the following information, determine the free cash flows associated with the project (tabulate your answer on a year by year basis), the project's net present value and the profitability index. Apply the appropriate decision criteria. Year 2 (per unit) Sales price per unit: Variable cost per unit: Year 1 (Per unit) $23,500 $25,000 Year 3 (Per unit) Year 4 (per unit) $39,500 $76,050 $93,000 $28,950 $42,050 $58,920 Year 5 (Per unit) Year 6 (Per unit) $93,000 $76,450 $60,100 $28,500 $312,000 $524,000 Annual fixed costs: Cost of new plant and/or equipment: Shipping and installation costs: Salvage value at termination: $105,000 $254,500 Unit Sales: Year Unit Sold 6 1 73 2 95 3 3 112 4 250 15 250 200 17.50% Company's marginal corporate tax rate: Project's required rate of return; 14.75% Seequent Inc., is a start-up in online exploration software development and it is considering its first project. This project involves the introduction of a new software to streamline data collection in exploration and mining industry. This project is expected to last 6 years and then the product line will be terminated. The company uses the simplified straight-line method over the project timeline. It is assumed that the plant and equipment will recover salvage value, if any, at the termination of the project. This project has the following working capital requirement: There will be an initial working capital requirement of $115,532 just to get the production started. For each year, the total investment in net working capital will equal 2.5% of the dollar value of sales for the upcoming year. All working capital is liquidated at the termination of the project at the termination year of the project. Given the following information, determine the free cash flows associated with the project (tabulate your answer on a year by year basis), the project's net present value and the profitability index. Apply the appropriate decision criteria. Year 2 (per unit) Sales price per unit: Variable cost per unit: Year 1 (Per unit) $23,500 $25,000 Year 3 (Per unit) Year 4 (per unit) $39,500 $76,050 $93,000 $28,950 $42,050 $58,920 Year 5 (Per unit) Year 6 (Per unit) $93,000 $76,450 $60,100 $28,500 $312,000 $524,000 Annual fixed costs: Cost of new plant and/or equipment: Shipping and installation costs: Salvage value at termination: $105,000 $254,500 Unit Sales: Year Unit Sold 6 1 73 2 95 3 3 112 4 250 15 250 200 17.50% Company's marginal corporate tax rate: Project's required rate of return; 14.75%
