XYZ, Inc. is considering a 5-year project. The production will require $1,500,000 in net working capital to start and addition net working capital investments each year equal to 15% of the projected sales increase for the following year. Total fixed costs are $1,350,000 per year, variable production costs are $225 per unit, and the units are priced at $345 each. The equipment needed to begin production has an intalled cost of $23,000,000. The equipment is qualified as seven-year MACRS property. In five years, this equipment can be sold for about $4,600,000. The company is in the 35% marginal tax bracket and has a required rate of return on all its projects of 18%.

Year

1

2

3

4

5

6

7

8

Projected unit sales

Year 1: 80,000

Year 2: 85,000

Year 3: 90,000

Year 4: 95,000

Year 5: 95,000

Year 6: 0

Year 7: 0

Year 8: 0

MACRS Rates

Year 1: 14.29%

Year 2: 24.49%

Year 3: 17.49%

Year 4: 12.49%

Year 5: 8.93%

Year 6: 8.92%

Year 7: 8.93%

Year 8: 4.46%

Initial NWC ($)

Additional NWC/year (% of projected sales increase the following year)

Fixed costs

Variable cost per unit

Unit price

Equipment cost

Salvage value ($)

Tax Rate

Required return

1. Please complete the cash flow estimation table. What are the projected cash flows for each year?

There should be no hard-keyed numbers in the table - all cell reference!

Year

0

1

2

3

4

5

Ending book value

Sales

Variable costs

Fixed costs

Depreciation

EBIT

Taxes

Net income

Depreciation

Operating cash flow

Change in NWC

CAPEX

Salvage value

Tax impact on sale of equipment

Total cash flow

2. What is the NPV and IRR for this project? Shall the project be accepted? Why?

NPV =

IRR =

3. The projected unit sales presented above is the most likely case. Please conduct a scenario analysis for the worst and best case scenarios. It's your understanding that the unit sales will be 10% less (more) for the worst (best) case scenario compares to the most likely case.

Best Case

Most Likely

Worst Case

NPV

IRR

4. Based on the results from scenario analysis, what's your recommendation? Please explain.

5. Based on the most likely scenario, what is the breakeven variable cost? Please analyze your results.

Breakeven Varible cost =