Question

P12-22 (similar to) Question p o (Related to Checkpoint 12.1) (Comprehensive problem calculating project cash flows, NPV,Pl, and IRROTwd Winds Corporation, a firm in the 33 percent marginal tax bracket with a required rate of return or discount rate of 11 percent is considering a new project. This project involves the introduction of a new product. The project is expected to 5 years and on because this is somewhat of a fad product, it will be berminated Given the following information, determine the tree cash fow e d with the project. The project's nel present the proftat index, and the male fretum Apply the propriate decision or Determine the free cash fows associated with the project The FCF in year is 5 (Round to the nearest dolar) Data Table Cost of new plant and equipment Shipping and installation costs: Un sales 14.400.000 1210.000 125,000 $340 in years 1 through 43290 unit in years Sales priceperunt Variable cost per unit Annual fredo Working-car rements: 300 000 There will be an initial working capital requirement of $190,000 to get production started. For each year, the investerin i ng will be multe percent of the door value of sales for that year. Thus, the investment in working capital will increase during years 1 though, then decrease in year 4. Finally, all working capitalist ed at the termination of the project at the end of years Use the f ronted over is assumed that the plant and w ent will have salvage valahar 5 years The depreciation method Enter your answer in the answer box and then click Check Answd Print Done

Answer 1

33% Tax rate Calculation of annual depreciation Total Depreciation Cost Dep Rate Depreciation Year-1 Year-2 Year-3 $ 14,610,000 $ 14,610,000 $ 14,610,000 20.00% 20.00% 20.00% $ 2,922,000 $ 2,922,000 $ 2,922,000 Year-4 Year-5 $ 14,610,000 $ 14,610,000 20.00% 20.00% $ 2,922,000 $ 2,922,000 $ 14,610,000 $ 14,610,000 $ 14,610,000 Calculation of after-tax salvage value Cost of machine Depreciation WDV Sale price Profit/(Loss) Tax Sale price after-tax Calculation of annual operating cash flow No of units Selling price Operating ost Sale Less: Operating Cost Contribution Year-1 Year-2 Year-3 Year-4 Year-5 85,000 125,000 125,000 95,000 85,000 $ 340 $ 340 $ 340 $ 340 $ 290 $ 180 $ 180 $ 180 $ 180 $ 180 $ 28,900,000 $ 42,500,000 $ 42,500,000 $ 32,300,000 $ 24,650,000 $ 15,300,000 $ 22,500,000 $ 22,500,000 $ 17,100,000 $ 15,300,000 $ 13,600,000 $20,000,000 $20,000,000 $ 15,200,000 $ 9,350,000 Less: fixed cost Less: Depreciation Profit before tax Tax@33% Profit After Tax Add Depreciation Cash Profit after-tax $ 600,000 $ 600,000 $ 600,000 $ 600,000 $ $ 2,922,000 $ 2,922,000 $ 2,922,000 $ 2,922,000 $ $ 10,078,000 $16,478,000 $ 16,478,000 $ 11,678,000 $ $ 3,325,740 $ 5,437,740 $ 5,437,740 $ 3,853,740 $ $ 6,752,260 $ 11,040,260 $ 11,040,260 $ 7,824,260 $ $ 2,922,000 $ 2,922,000 $ 2,922,000 $ 2,922,000 $ $ 9,674,260 $ 13,962,260 $ 13,962,260 $ 10,746,260 $ 600,000 2,922,000 5,828,000 1,923,240 3,904,760 2,922,000 6,826,760

Calculation of working capital movement Working capital-opening Closing working capital Movement $ $ $ - 190,000 190,000 $ $ $ 190,000 $ 2,312,000 $ 2,122,000 $ 2,312,000 $ 3,400,000 $ 1,088,000 $ 3,400,000 $ 3,400,000 $ $ 3,400,000 $ 2,584,000 2,584,000 $ (816,000) $ (2,584,000) Calculation of NPV Year NH 11.00% Capital Working capita Operating cash Annual Cash flo PV factor Present values $ (14,610,000) $ (190,000) $ (14,800,000) 1.0000 $ (14,800,000) $ (2,122,000) $ 9,674,260 $ 7,552,260 0.9009 $ 6,803,838 $ (1,088,000) $ 13,962,260 $ 12,874,260 0.8116 $ 10,449,038 $ 13,962,260 $ 13,962,260 0.7312 $ 10,209,084 $ 816,000 $ 10,746,260 $ 11,562,260 0.6587 $ 7,616,419 $ - $ 2,584,000 $ 6,826,760 $ 9,410,760 0.5935 $ 5,584,828 5 Net Present Value $ 25,863,207 Calculation of Profitability index (PI) PI= Sum of PV of cashinflows/Outflows PI= 40663207.05/14800000 PI= 2.75

Calculation of IRR Year 1 2 3 64.00% 65.00% PV factor @ PV factor @ Total cash flow 64% Present values 65% Present values $ (14,800,000) 1.000 $ (14,800,000) 1.000 $ (14,800,000) $ 7,552,260 0.610 $ 4,605,037 0.606 $ 4,577,127 $ 12,874,260 0.372 $ 4,786,682 0.367 $ 4,728,837 $ 13,962,260 0.227 $ 3,165,368 0.223 $ 3,108,164 $ 11,562,260 0.138 $ 1,598,333 0.135 $ 1,559,937 $ 9,410,760 0.084 $ 793,242 0.082 $ 769,494 $ 148,661 $ (56,441) IRR IRR =Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV) '=64%+ (65%-64%)* (148661./(148661.-(-56441.) 64.72%