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You are financial managers of a company which makes printers. Currently you are using NPV method to evaluate a 10-year project that produces a new
You are financial managers of a company which makes printers. Currently you are using NPV method to evaluate a 10-year project that produces a new model.
The WACC is 10% and the tax rate is 21%. (2 points)
- The project needs a set of machine that is worth $5 million. The company uses 10-year straight-line depreciation.
- In the past two years, the company spent $800,000 in R&D in developing the new model.
- The project will be partially financed with debt, and the interest to be paid every year is $100,000.
- If the new project is taken, it is expected that the current inventory level will increase by $1,500,000, account receivable will increase by $1 million, account payable increases by $800,000, and the minimum cash balance will increase by $0.5 million.
- The sales from this project will be $8 million per year of which 20 percent will be from lost sales of existing products.
- The variable costs of the production will be 30% of the sales.
- The project will require hiring a new manager, who will cost $100,000 per year. In addition, the firm needs to rent a new office for $50,000 a year.
- Currently, the overhead of the firm is $500,000. And the accounting department will allocate 20% of it to the new project.
Question 1: How much is the initial investment at t=0?
Question 2: How much is the operating cash flow for the first year?
Question 3: How much is the non-operating cash flow at the end of the last year?
Question 4: How much is the NPV?
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