. Your company is deciding whether to invest in a new project to produce medical testing equipment Here are the details of the potential investment: The new project will require the company to purchase machinery that will cost $50M now can t=0). The machinery will be fully depreciated on a straight line basis based on a 15 year depreciation schedule. The company expects to end the project and sell the machinery for $20M after 8 years of operation The company has already spent $5M on R&D. If the project moves forward, another $1M will be spent immediately (at t=0) to finalize the product. The project will require an immediate (t=0) investment of $3M in Net Working Capital. Future year end Net Working Capital balances will equal 10% of the following year's expected sales. All working capital will be recovered at the end of the project (in year 8). The company's tax rate is 25%, and the company is highly profitable overall The project is expected to produce sales of $20 million in year 1, which will then grow at 5% per year through year 8. Cost of goods sold is expected to equal 70% of sales in year 1.50% of sales in year 2, and 40% of sales thereafter. Other operating expenses (excluding depreciation) will equal 20% of sales in all years. a. (12 points) What is your estimate of the incremental free cash flows this project would generate now (at t=0) and for the eight years the project would be operated? b. (3 points) The appropriate discount rate is 10% for this project. What is the project's NPV? What is its IRR? Should the company pursue this project? . Your company is deciding whether to invest in a new project to produce medical testing equipment Here are the details of the potential investment: The new project will require the company to purchase machinery that will cost $50M now can t=0). The machinery will be fully depreciated on a straight line basis based on a 15 year depreciation schedule. The company expects to end the project and sell the machinery for $20M after 8 years of operation The company has already spent $5M on R&D. If the project moves forward, another $1M will be spent immediately (at t=0) to finalize the product. The project will require an immediate (t=0) investment of $3M in Net Working Capital. Future year end Net Working Capital balances will equal 10% of the following year's expected sales. All working capital will be recovered at the end of the project (in year 8). The company's tax rate is 25%, and the company is highly profitable overall The project is expected to produce sales of $20 million in year 1, which will then grow at 5% per year through year 8. Cost of goods sold is expected to equal 70% of sales in year 1.50% of sales in year 2, and 40% of sales thereafter. Other operating expenses (excluding depreciation) will equal 20% of sales in all years. a. (12 points) What is your estimate of the incremental free cash flows this project would generate now (at t=0) and for the eight years the project would be operated? b. (3 points) The appropriate discount rate is 10% for this project. What is the project's NPV? What is its IRR? Should the company pursue this project
