XCG Corp is considering launching a portable Wi Fi media player called Meteor with the following

parameters:

Product life cycle of 4 years

Last years Research & Development(R&D) costs of Mateor are $10 million

Initial Capital Expenditures to be paid are $4 million

The companys income tax rate is 40%

The cost of capital is 9% per year

At the end of year 4, XCG Corp expects to salvage project assets for 0.8 million.

Answer the following questions

.

a)

Determine the impact on NPV of R&D costs of

Meteor.

b)

Determine the impact on NPV of the initial capital expenditure and salvage of capital assets(ignore

CCA or depreciation at this point)

c)

XCG Corp expects to sell 100,000 units of the player per year over the next four years.

i)It expects to sell Meteor at $240 per unit at the end of the first year, which is expected to

decline by 1% a year during the project life.

Determine the impact on NPV of the incremental

revenues of the project.

ii) The expected production cost at the end of the first year is $200 per unit. Production costs are expected to grow at 2% per year during the project life.

Determine the impact on NPV of the

incremental production costs of the project

d)The CFOs team predicts that the proposed will require the following levels of current asset and current liability items during the life of the project

Year 0

Year 1

Year 2

Year 3

Year 4

Receivables

$3,600,000.00

$3,560,000.00

$3,530,000.00

$3,500,000.00

$0.00

Payables

$3,000,000.00

$3,060,000.00

$3,130,000.00

$3,200,000.00

$0.00

Determine the impact on NPV of the changes in net working capital amounts.

e)

For tax purposes, capital assets are depreciated at the rate d = 30%. Assume that XCG Corp anticipates that in the tax year of the asset sale the asset pool will continue and there will be

negative net additions to the pool

Determine the impact on NPV of the equipments CCA tax

shields.

f)

What is the free

cash flow from the Meteor project in year

g)

Should XCG Corp launch the Meteor project? Justify your answer.