Question
ZXY Company is considering a new line of business. The basic information on the project is as follows. - Unit price of products starts at
ZXY Company is considering a new line of business. The basic information on the project is as follows.
- Unit price of products starts at $100 and will drop to $90 after 2 years because of expected competition.
- Projected unit sales are 6,000 for the first 2 years and 5,000 for the next 2 years (4-year project)
- The project requires $30,000 as net working capital in the beginning (year 0) and subsequently 10% of sales from year 1 to year 3. The working capital will be fully recovered at the end of year 4.
- Variable costs: $50 per unit.
- Fixed costs: $40,000 per year.
- Initial costs: $400,000 to buy the equipment necessary and no salvage value expected after the project.
- Depreciation: straight-line depreciation to zero by the end of the project.
- Consulting fees of $50,000 already paid last year.
- Tax rate: 20% - Required return for the firms existing lines of business: 11%
- Required return for this new line of business: 13%
(a) Provide the pro forma income statement of this project and calculate projected operating cash flows each year for 4 years.
(b) Estimate project cash flows (i.e., CFFA) each year.
(c) Compute the net present value of this project. Should the firm accept this project?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started