Working capital impact on project. iCovers, Incorporated wants to make covers for all the products that Apple manufactures. The company is looking at new covers for the iPhone, iPad, iPalm, iThumb, and iEye. The initial investment in capital equipment will be $10,000,000. The projected revenues and costs are:

1 2 3 4 5 6

Revenue $10,000,000 $13,000,000 $17,000,000 $23,000,000 $18,000,000 $12,000,000

Variable $ 4,000,000 $ 5,200,000 $ 6,800,000 $ 9,200,000 $ 7,200,000 $ 4,800,000

Fixed $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000

S, G & A $ 1,250,000 $ 1,400,000 $ 1,750,000 $ 2,000,000 $ 2,000,000 $ 1,500,000

The initial investment in working capital is $2,000,000. However, working capital will increase or decrease each year so that it is always 20% of the anticipated revenue for the coming year. The equipment will be depreciated using a MACRS five-year life, and there is no salvage value for the equipment at the end of the six-year project. The tax rate for iCovers is 37%. Using a spreadsheet, set up the projects incremental cash flows showing the initial outlay (both capital and working capital), the operating cash flow each year, and the change in working capital each year. Note that the company will terminate the project in year six. Then calculate the projects IRR and NPV if the projects discount rate is 14%.