Question

(Related to Checkpoint 12.1) (Comprehensive problem-calculating project cash flows, NPV, PI, and IRR) Traid Winds Corporation, a firm in the 30 percent marginal tax bracket with a required rate of return or discount rate of 10 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 free cash flows associated with the project. The FCF in year 0 is $ . (Round to the nearest dollar.)

Answer 1

Answer:

FCF in year O is ($14,610,000) NPV Profitability Index IRR $13,991,835.27 1.96 41.28%

Working:

Let us first calculate Increase/decrease in working capital each year:

4 Year Units sold Sales Price Sales revenue Working capital requited Increase (Decrease) in Working capital required 60,000 $310 $18,600,000 $1,488,000 $1,298,000 115,000 $310 $35,650,000 $2,852,000 $1,364,000 115,000 $310 $35,650,000 $2,852,000 $0 70,000 $310 $21,700,000 $1,736,000 ($1,116,000) 60,000 $260 $15,600,000 $1,248,000 ($1,736,000) $190,000 | $190,000
Free cash flows, NPV, PI and IRR are calculated and given as below:

Year Cost of new plant and equipment Shipping and installation Installed cost Increase/Recovery in/of Working capital ($14,200,000) ($220,000) ($14,420,000) ($190,000) ($1,298,000) ($1,364,000) $0 $1,116,000 $1,736,000 Sales Revenue Variable cost (units sold * $180) Fixed cost Depreciation EBIT Tax at 30% EAT Add back depreciation Cash from operations $18,600,000 ($10,800,000) ($800,000)| ($2,884,000) $4,116,000 ($1,234,800)| $2,881,200 $2,884,000 $5,765,200 $35,650,000 $35,650,000 $21,700,000 $15,600,000 ($20,700,000)| ($20,700,000)| ($12,600,000)| ($10,800,000) ($800,000) ($800,000)| ($800,000) ($800,000) ($2,884,000) ($2,884,000)| ($2,884,000) $2,884,000) $11,266,000 $11,266,000 $5,416,000 $1,116,000 ($3,379,800)| ($3,379,800)| ($1,624,800)| ($334,800)|| $7,886,200 $7,886,200 $3,791,200 $781,200 $2,884,000 $2,884,000 $2,884,000 $2,884,000 $10,770,200 $10,770,200 $6,675,200 $3,665,200 $7,791,200 0.683013455 $5,321,494.43 $5,401,200 0.620921323 $3,353,720.25 Cash flow PV factor (1/(1+10%)“Year) PV of cash flows NPV Profitability Index IRR ($14,610,000) $4,467,200 $9,406,200 $10,770,200 11 0.909090909 0.826446281 0.751314801 ($14,610,000.00 $4,061,090.91 $7,773,719.01 $8,091,810.67 $13,991,835.27 1.96 41.28%