The Lonestar Corporation is considering a new project. The project involves the introduction of a new product that is expected to have a five-year lifespan, at which time production will be stopped and the plant left idle. The corporation has a 15 percent required rate of return on all investments and is taxed at a 21 percent marginal rate. Table 1 contains the revenue and cost assumptions for the project.

Table 1: You supply an appropriate descriptive title

Straight-line depreciation, no salvage value		Sales Volume
Cost of new plant & equipment	$ 18,800,000	Year	Units Sold
Shipping & installation costs	$ 200,000	1	75,000
Sales price per unit: years 1 - 4	$ 230	2	120,000
Sales price per unit: year 5	$ 200	3	120,000
Variable cost per unit	$ 145	4	80,000
Annual fixed costs	$ 1,200,000	5	75,000

Items to complete:

1. Determine the operating cash flows associated with the project by completing Table 2. For this problem, operating cash flows (OCF) are determined by the formula OCF* = EBIT taxes + depreciation. (10 points)
2. Determine the projects net present value, profitability index, and internal rate of return. (3 points)
3. Using the results from the capital budgeting techniques in part (2), explain why you would or would not invest in this project. (2 points)
4. Create a decision-making spreadsheet that will permit the instructor to change a few of the initial assumptions and immediately see the effects on NPV, PI, and IRR. Hint: Table 1 information, plus other parameters, should comprise the initial assumptions section of your spreadsheet. (5 points)

Table 2: You supply an appropriate descriptive title

Item/Year	0	1	2	3	4	5
Units sold	XX
Sales revenue	XX
Variable costs	XX
Fixed costs	XX
Depreciation	XX
EBIT	XX
Taxes	XX
Operating CF*	(??)