The board of directors of Koplaye Instruments Inc. is considering investing more than $5.8 million in the construction of a new plant to produce widgets for export. Although several members of the board have reservations about the project, many feel that the company has made a wise decision. The treasurer of the company has been able to raise funds from different sources and says that the company’s cost of capital would be 11%. The board members feel that the project is not too risky and that a 15% hurdle rate would be acceptable. The engineers of the company present the following information and estimate the life of the project to be 10 years.

The marketing department indicates that there would be $300,000 invested in working capital in year 1, $250,000 in year 2, and $200,000 in year 3.

The controller provides the details of the project’s projected revenue and cost data.

The company’s controller estimates that $600,000 of the working capital will be recovered at the end of the project. The engineers estimate that the capital assets will be sold at the end of year 10 for $2 million. The company’s income tax rate is 46%.

With the above information, calculate the following for the project:

1. Annual cash flow forecast during the 10-year period by using the actual CCA rates

2. Payback period.

3. Net present value using the cost of capital and the hurdle rate

4. Internal rate of return.

5. Profitability index.

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Costs (in 000s) CCA Land $ 600 Buildings 2,000 5% Machinery/equipment 2,500 20% Research and development 500 20% Other assets 200 10% Total assets $5,800