Question
You are evaluating a project for Ultimate Inc. The project produces chew-resistant doghouses. You estimate the sales price of these doghouses to be $500 and
You are evaluating a project for Ultimate Inc. The project produces chew-resistant doghouses. You estimate the sales price of these doghouses to be $500 and sales volume to be 2,500 units per year over the projects three-year life. Variable costs amount to $300 per unit and fixed costs (not including depreciation) are $150,000 per year. The project requires an initial investment of $250,000 and this will be depreciated on a straight-line basis to zero over the three-year project life. There will be an initial net working capital investment of $90,000 (t0) and two further investments of $90,000 at the beginning of each year thereafter. The full amount of working capital will be recovered at the end of the projects life (i.e., $270,000 at t3). The tax rate is 35% and the required return on the project is 15%.
a. What is the EBIT for the project in the first year?
b. What is the operating cash flow for the project in year 2?
c. Suppose the actual market value of the initial investment at the end of year 3 is $50,000. What is the effect of the $50,000 salvage value on year 2 cash flows?
d. What is the NPV of this project?
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