1. The relevant information for a long-lived capital budgeting project is presented below. Use the information to complete the following exercises.

1. Estimate the expected cash flows of the project in Years 0 through 4.
2. Estimate the NPV and IRR of the project.
3. Conduct a sensitivity analysis that shows what happens to the NPV of the project when the growth rate of the cash flows after Year 4 ranges between 0% and 5% (use 0.5% increments, e.g., 0%, 0.5%, 1%, 1.5%, and so forth).

PROJECT INFO

In Year 0

The firm will purchase new machinery (fixed asset) for $25,000, and net working capital will increase by $10,000.

In Years 1 through 4

1. Management expects annual sales to be $75,000 per year.
2. Variable Operating costs per year will be 95% of sales.
3. Fixed Operating Costs: $1,000 per year

After Year 4

Project cash flows after Year 4 are expected to grow at 2.5% per year in perpetuity.

Additional Info

1. In Years 1, 2, 3, and 4, the MACRS depreciation rates are 3.8%, 7.2%, 6.8%, and 6.2% respectively.
2. The machinery purchased in Year 0 will be used indefinitely and thus will have no salvage value. Also, since the project will operate indefinitely, there is no projected recovery of net working capital.
3. Tax Rate = 40%
4. WACC (project discount rate) = 9%

(solve un excel)