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You are Manager of the Kumar Campany and working on the campanys Capital Structure. The Kumar Corpotation, a firm in the 34% marginal taxbracket with
You are Manager of the Kumar Campany and working on the campanys Capital Structure.
The Kumar Corpotation, a firm in the 34% marginal taxbracket with a 15% required rate of return or cost of capital, is considering a new project. This project involves the introduction of a new product. The project is expected to last five years and then, because this is somewhat of a fad project, to be terminated.
- Cost of new plant and equipment: $ 9,900,000
- Shipping and installation cost: $ 100,000
- Unit Sales: Year Unit sold
1 8,000
2 10,000
3 15,500
4 9,500
5 9,500
- Sales price per unit: $350 / unit in years 1 and 2, $300 / unit in year 3,4 and 5
- Variable cost per unit: $50 / unit
- Annual fixed costs: $ 200,000
- Working Capital Requirement: There will be an initial working capital requirement of $ 100,000 just to get production started. Then, for each year , the total investment in NWC will be equal to 10% of the dollar value of sales for that year. Finally, 90 percent of the working capital is liquidated at the termination of the project at the end of year 5.
- The Depretiation Method: We used the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 years.
- Interest Expenses: There will be an interest payment of $100,000 every year for five years.
- Given the following information, Use Excel Programa and determine the free cash flows associated with the project.
- Use Excel Program and calculate NPV (Net Present Value) and the IRR (Internal Rate of Return).
- According to your NPV and IRR result in section b), as a Financial Manager, do you accept or reject the preoject? Why?
- Use calculator to find the NPV ? Do you accept the project? Explain your result.
- Use Payback Period ? Do you accept the project? Explain your result.
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