Question

(Comprehensive problem​) The Shome​ Corporation, a firm in the 32 percent marginal tax bracket with a required rate of return or cost of capital of 16 ​percent, is considering a new project. The project involves the introduction of a new product. This project is expected to last 5 years and​ then, because this is somewhat of a fad​ product, 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.

Cost of new plant and equipment      $6,700,000     

Shipping and installation costs           $160,000        

Unit sales                   

                YEAR UNITS SOLD

                    1   60,000

                    2   110,000

                    3   130,000

                    4   50,000

                    5   50,000

                       

Sales price per unit     $330/unit in years 1 through 4, $280/unit in year 5

Variable cost per unit $150/unit       

Annual fixed costs       $220,000        

a. What is the initial outlay associated with this​ project?

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins Formulas - 2x 11 A = = = V General A A File Home Insert Page Layout % Cut Calibri Ea Copy Paste Format Painter BIU - D Clipboard Font AR1 fx - AQ I AR SF Wrap Text Merge Merge & Center - Center $ 4:0 .00 :.: Insert Delete Format % % , Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Alignment Cells AS AT AU AV AW AX AY AZ BA BEZ UNITS 50000 60000 330 110000 330 50000 330 130000 330 150 3 280 VC 150 150 150 150 5 1 2 4 -6860000 11 12 YEAR COST OF MACHINE NWC SALES VARIABLE COST FIXED COST DEPRECIATION PBT TAX @32% PAT DEPRECIATION CFAT RECOVERY OF NWC TERMINAL CFAT PV FACTOR @16% 19800000 9000000 220000 1372000 9208000 2946560 6261440 1372000 7633440 36300000 42900000 16500000 19500000 220000 2 20000 13720001372000 18208000 21808000 5826560 6978560 12381440 14829440 1372000 1372000 13753440 16201440 1 6500000 7500000 220000 1372000 7408000 2370560 5037440 1372000 6409440 14000000 7500000 220000 1372000 4908000 1570560 3337440 1372000 4709440 14 -6860000 17 18 19 20 21 763344013753440 16201440 0.8621 0.7432 0.6407 6580551.72 10221046.37 10379576.86 6409440 0.5523 3539876.65 4709440 0.4761 2242225.68 26103277.29 NPV -6860000 H M HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND MI-np-ir_ REPLACEMENTS ferences Rea OPTION TO WAITSTEIN indiffEPS EBIT LEASE SLM GOLF IRRMACI BOJ 120% 2. B 19 * 40 ENG 30-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Calibri 11 A = = = V General A A E Copy Paste Format Painter Clipboard Wrap Text Merge Merge & Center - Center BIU - D SF $ 4:0 .00 :.: Insert Delete Format % % , Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Font Alignment Cells AR38 - AQ AR AS AT AU AV AW AX AY AZ BA B E 21 22. -6860000 24 25 26 27 28 29 30 31 INITIAL OUTLAY CASH FLOWS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 7633440 13753440 16201440 6409440 4709440 NPV PROFITABILITY INDEX 26103277.29 4.81 [1 +(NPV/INITIAL INVESTMENT) 32 IRR 142.58% (=IRR(AT18:AY18)] 33 34 35 36 37 38 39 40 41 H M HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTEIN indiffEPS EBIT MI-np-ir_ REPLACEMENTS ferences LEASE SLM GOLF IRRMACI BOI 120% - Rea ...B 199 * 10 ENG 30-11-2019