Question

(Related to Checkpoint 12.1) (Comprehensive problem-calculating project cash flows, NPV, PI, and IRR) Traid Winds Corporation, a firm in the 32 percent marginal tax bracket with a required rate of return or discount rate of 13 percent, is considering a new project. This project involves the introduction of a new product. The project is expected to last 5 years and then because this is somewhat of a fad product, it will be terminated. Given the following information, determine the free cash flows associated with the project, the project's net present value, the profitability index, and the internal rate of return. Apply the appropriate decision criteria a. Determine the 0 Data Table - The FCF in year o X Cost of new plant and equipment Shipping and installation costs Unit sales $14,200,000 $220,000 Year ن أنه في Units Sold 80,000 125,000 125,000 90,000 80.000 ل ا Sales price per unit Variable cost per unit: Annual fixed costs Working-capital requirements. $320/unit in years 1 through 4, 5270/unit in year 5 $120/unit $750 000 There will be an initial working capital requirement of $180,000 to get production started. For each year the total investment in net working capital will be equal to 9 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. Use the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 years The depreciation method:

Answer 1

		Present Value(PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=discount rate =13%=0.13
		N=Year   of Cash Flow
		Total Depreciable asset:
	A	Cost of Equipment	$14,200,000
	B	Shipping and Installation	$220,000
	C=A+B	Total Depreciable asset:	$14,420,000
	D=C/5	Annual Depreciation expense	$2,884,000
	N	Year	0	1	2	3	4	5
	a	Initial Cash flow for purchase of asset	-$14,420,000
	b	Sales in unit		80,000	125,000	125,000	90,000	80,000
	c	Sales Price per unit		$320.00	$320.00	$320.00	$320.00	$270.00
	d=b*c	Annual Sales Revenue		$25,600,000	$40,000,000	$40,000,000	$28,800,000	$21,600,000
	e=b*$120	Variable Cost		-$9,600,000	-$15,000,000	-$15,000,000	-$10,800,000	-$9,600,000
	f	Annual Fixed Costs		-$750,000	-$750,000	-$750,000	-$750,000	-$750,000
	g	Annual Depreciation expense		-$2,884,000	-$2,884,000	-$2,884,000	-$2,884,000	-$2,884,000
	h=d+e+f+g	Before tax operating profit		$12,366,000	$21,366,000	$21,366,000	$14,366,000	$8,366,000
	i=-g*32%	Tax Expenses(Tax Rate =32%)		-$3,957,120	-$6,837,120	-$6,837,120	-$4,597,120	-$2,677,120
	j=h+i	After tax operating profit		$8,408,880	$14,528,880	$14,528,880	$9,768,880	$5,688,880
	k	Add depreciation expenses(non cash)		$2,884,000	$2,884,000	$2,884,000	$2,884,000	$2,884,000
	l=j+k	Annual Operating Cash Flow		$11,292,880	$17,412,880	$17,412,880	$12,652,880	$8,572,880
		Working Capital Cash Flow:
	m	Working Capital Needed	$180,000	$2,304,000	$3,600,000	$3,600,000	$2,592,000	$0
	n	Cash flow due to change in working capital	-$180,000	-$2,124,000	-$1,296,000	$0	$1,008,000	$2,592,000
	CF=a+l+n	Net Cash Flow	($14,600,000)	$9,168,880	$16,116,880	$17,412,880	$13,660,880	$11,164,880	SUM
	PV=CF/(1.13^N)	Present Value of Net Cash Flow	($14,600,000)	$8,114,053	$12,621,881	$12,067,999	$8,378,474	$6,059,850	$32,642,257
	NPV=Sum of PV	Net Present Value(NPV)	$32,642,257
		Profitability Index =(NPV+Initial Outlay)/Initial Outlay
		Initial Outlay =	$14,600,000
		Profitability Index=	3.24	(32642257+14600000)/14600000=
		Internal Rate of Return	81.98%	(Using IRR Function of exel over the Net Cash Flow)
								136 x fc =IRR(129:N29) F K L M N O 1 2 3 4 5 0 -$14,420,000 G H N Year Initial Cash flow for purchase of asset Sales in unit Sales Price per unit d=b*c Annual Sales Revenue e=b*$120 Variable Cost Annual Fixed Costs Annual Depreciation expense h=d+e+f+g Before tax operating profit i=-g*32% Tax Expenses(Tax Rate =32%) j=h+i After tax operating profit Add depreciation expenses(non cash) Annual Operating Cash Flow Working Capital Cash Flow: m Working Capital Needed Cash flow due to change in working capital CF=a+|+n Net Cash Flow PV=CF/(1.134N) Present Value of Net Cash Flow NPV=Sum of PV Net Present Value(NPV) 80,000 $320.00 $25,600,000 -$9,600,000 $750,000 -$2,884,000 $12,366,000 -$3,957,120 $8,408,880 $2,884,000 $11,292,880 125,000 $320.00 $40,000,000 $15,000,000 $750,000 -$2,884,000 $21,366,000 - $6,837,120 $14,528,880 $2,884,000 $17,412,880 125,000 90,000 $320.00 $320.00 $40,000,000 $28,800,000 $15,000,000 - $10,800,000 $750,000 $750,000 -$2,884,000 $2,884,000 $21,366,000 $14,366,000 $6,837,120 $4,597,120 $14,528,880 $9,768,880 $2,884,000 $2,884,000 $17,412,880 $12,652,880 80,000 $270.00 $21,600,000 $9,600,000 $750,000 $2,884,000 $8,366,000 $2,677,120 $5,688,880 $2,884,000 $8,572,880 I=j+k $180,000 -$180,000 ($14,600,000) ($14,600,000) $32,642,257 $2,304,000 -$2,124,000 $9,168,880 $8,114,053 $3,600,000 $1,296,000 $16,116,880 $12,621,881 $3,600,000 $2,592,000 $0 $0 $1,008,000 $2,592,000 $17,412,880 $13,660,880 $11,164,880 SUM $12,067,999 $8,378,474 $6,059,850 $32,642,257 Profitability Index =(NPV+Initial Outlay)/Initial Outlay Initial Outlay = $14,600,000 Profitability Index= 3.24 (32642257+14600000)/14600000= Internal Rate of Return 81.98%! (Using IRR Function of exel over the Net Cash Flow)