Question
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
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 =
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