You have an idea for a new product that can be developed and sold by your small business. You need to analyze the prospects for success by developing an assumption for cash flows and calculating the potential return on your investment. Here are some of the details. You expect to sell this product for 5 years. After that time there will be no demand for the product. You have estimated earnings before interest, depreciation and taxes at $175,000 for each of the next 5 years. The investment in equipment will cost you $500,000. This is the only investment you need to make. You can depreciate the equipment cost over the 5 years in equal amounts. Your tax rate is 30%.

You dont want to invest any of your own money unless you can get a least a 16% return on your investment. The bank has seen your business plan and will loan you 50% of the capital you need for the project at 12%.

1. Calculate the cash flow for each of the 5 years.
2. Calculate the payback period on this project.
3. Using your WACC, calculate the NPV on this project and Profitability Index.
4. Estimate the IRR.
5. Accept? Reject?

Cash Flow Projections

0 1 2 3 4 5

EBITD $175,000 $175,000 $175,000 $175,000 $175,000

Deprec ________ ________ ________ ________ ________

EBIT ________ ________ ________ ________ ________

Interest ________ ________ ________ ________ ________

EBT ________ ________ ________ ________ ________

Taxes ________ ________ ________ ________ ________

CASH

FLOW ($500,000) ________ ________ ________ ________ ________

Payback = ________ (round to closest number of years)

NPV = __________ ( Discount rate = ____ %) Profitability Index = ____________

IRR = Greater than 14% or Less than 14%

Circle one => Accept Reject