TTT Inc. currently has one product, low-priced cordless drills and a variety of drill bits. TTT Inc. has decided to sell a new line of medium-priced cordless drills. The project is expected to last 10 years. The plant and equipment required for producing the new line of drills costs $10 million and will be depreciated down to zero over 20 years using straight-line depreciation. It is expected that the plant and equipment can be sold for $6 million at the end of 10 years. The plant will be built in a land (unused at the moment) that was purchased for $2 million three years ago (however, the land was never used as the project for it was not launched). Today, that land can be sold for $3 million (net of taxes). If the land is used in this project, it is estimated that it would be sold at the end of the project (10 years) for $3 million. Sales for the new line of drills are estimated at $10 million per year. Variable costs are 60% of sales. The fixed costs each year will be $3 million. The company has spent $1.5 million in research and a marketing study that determined due to the introduction of the higher end compatible cordless drill, the sales of drill bits by the company will increase by $3 million in a year. The production variable cost of the drill bits is $1 million a year. However the sales of existing cord drills will dropped (transferred sales to new drill which are already reflected the above given sales estimate for new drills) by $2 million a year, the variable costs for these sales is $1 million a year. The new drills will also require, today, an increase in net working capital of $2.5 million that will be returned at the end of the project. The tax rate is 20 percent and the required rate of return for the project is 15%. 1. What is the life of the project (time spam or investment horizon)? A 2. What is the discounting rate for the cash flows of this project? Do not enter the % sign and round to and use 2 decimals, for example, if the answer is 5.275% then enter 5.28; if your answer is 4% you must enter 4.00, if it is 3.4% you must enter 3.40 A Part I: Computing Initial Outlay (10) 3. What is the investment in Plant and Equipment (P&E) today? A 4. Is there an opportunity cost for the land? Answer yes or no (lower case) A 5. What is the amount to be charged to the project for the land? A 6. What is the investment in working capital today? A 7. What is the amount of Initial Outlay (IO) today for this project? A/ ======== Part II: Computing the Termination Value (TV) of the project 8. What is the proceeds for selling the land at the end of the project? A 9. Are there tax effects from this sale? Answer yes or no (using only lower case) A 10. What is the depreciable life of the P&E in years? A A 11. What is the amount of annual depreciation for P&E? 12. What is the amount of cumulative depreciation by the end of A 13. What is the remaining book value (RBV) of P&E at the end of the project? A 14. Are there tax effects from the sale of the P&E at the end of the project? Answer yes or no (lower case) the project for P&E? A 15. Do we have a capital gain or a capital loss from the sale of the P&E at the end of the project? Answer either capital gain or capital loss (lower case) A/ 16. What is the amount of capital gain (or loss) in the sale of the P&E at the end of the project? 17. What is the amount of the tax effect from the sale of the P&E at the end of the project? A 18. Is the tax effect positive or A/ negative? Answer with the word positive or negative (lower case) 19. What is the termination value (TV) of the P&E at the end of the project? A 20. What is the amount of recovery of working capital at the end of the project? A 21. What is the TV of the land at the end of the project? A/ ?? What in the T cen 3 w Part III: Computing Operating Cash Flows (OCF) 23. What is the amount of annual sales (revenues) for this project? A 24. What is the annual amount of cost of goods sold (CGS) for A 25. Are there erosion of sales effects in this project? these sales? Answer yes or no (lower case). A 26. What is the amount of erosion of annual sales for this project? A 27. What is the annual variable costs of the erosion of sales? A 28.Are there synergies effects in A 29. What is the this project? Answer yes or no (lower case) annual amount of additional sales of existing products (synergies)? A/ 30. What are the annual variable costs associated with the synergy sales? A 31. What is the annual amount of fixed costs for this project? A 32. Are there any other annual costs for this project that must be considered in the income statement? Answer yes or no (lower case) A 33. What is the annual EBITDA? A 34. What is the annual A/ depreciation? A 35. What is the annual EBIT? 26-Wh considered in the income statement? Answer yes or no (lower case) A 33. What is the annual EBITDA? A 34. What is the annual depreciation? A 35. What is the annual EBIT? 36. What is the amount of annual taxes? A 37. What is the annual A net income (NI)? A 38. What is the annual OCF? ==== ========= Part IV: Computing the NPV 39. What is the value of the PVIFA to use to discount the OCFS in this project? Use 4 decimals in your answer. A 40. What is the present value of all the OCFs for this project? A 41. What is the PVIF to be use to discount the TV of this project? Use 4 decimals in your answer. A42. What is the present value of the TV of this project? A 43. What is the NPV of the project? A Should the project be accepted or rejected? Answer with the N word accepted or rejected (lower case) Understanding NPV and decision rules 45. Is the Internal rate of return (IRR) of this project greater, equal, or lower than 15%? Answer using one of these three words: greater, equal, lower (in lower case) A 46. Is the profitability index (PI) of this project greater, equal, or lower than 1? Answer using one of these three words: greater, equal, lower (in lower case)