Question
Thunderbolt Corporation is considering an investment project to produce electric gadgets. Cathie Wood projected unit sales of these gadgets to be 10,000 in the first
Thunderbolt Corporation is considering an investment project to produce electric gadgets. Cathie Wood projected unit sales of these gadgets to be 10,000 in the first year, with growth of 6.5 percent each year over the subsequent five years (so the total project life is six years). Production of these gadgets will require $1,200,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $3,000,000 per year, variable production costs are $350 per unit, and the units are priced at $850 each. The equipment needed to begin production will cost $8,400,000. The equipment will be depreciated using the straight-line method over a six-year life and has a pre-tax salvage value of $520,000 when the project closes. The tax rate is 25%.
a) Set up a table that shows your detailed calculation of the project cash flows for each year throughout the life of the project. Please include this table in your case study write-up or submit the Excel spreadsheet together with your case write up by email.
b) Using the cost of capital that you found in part 4c above (if you have difficulty in determining the WACC in part 4c, then assume 6.5% as the cost of capital for this question) as the required rate of return, what are the NPV and IRR of this project?
c) Should Thunderbolt Corporation accept or reject this project? Why or why not?
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