Question

Scores o oT4 p Question Help P12-22 (similar to) (Related to Checkpoint 12.1) (Comprehensive problem calculating project cash flows, NPV, Pl, and IRR) Traid Winds Corporation, a firm in the 36 percent marginal tax bracket with a required rate of return or discount rate of 12 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, m. determine the free cash flows associated with the project, the projecfs net present value, the profitability index, and the internal rate of retun. Apply the appropriate decision criberia a. Determine the free cash flows associated with the project The FCF in year 0 is S (Round to the nearest dolar)

Answer 1

1]	FCF for years 0 - 5	0	1	2	3	4	5
	Units sold		80000	135000	135000	90000	80000
	Sales price per unit		$                 290	$                   290	$                  290	$                 290	$                 240
	Total sales revenue		$ 2,32,00,000	$   3,91,50,000	$   3,91,50,000	$ 2,61,00,000	$ 1,92,00,000
	-Variable cost		$ 1,44,00,000	$   2,43,00,000	$   2,43,00,000	$ 1,62,00,000	$ 1,44,00,000
	-Annual fixed costs		$       7,50,000	$         7,50,000	$         7,50,000	$       7,50,000	$        7,50,000
	-Depreciation expense [14990000/5]		$     29,98,000	$       29,98,000	$      29,98,000	$     29,98,000	$     29,98,000
	=NOI		$     50,52,000	$   1,11,02,000	$   1,11,02,000	$     61,52,000	$     10,52,000
	-Tax at 36%		$     18,18,720	$       39,96,720	$      39,96,720	$     22,14,720	$        3,78,720
	=NOPAT		$     32,33,280	$       71,05,280	$      71,05,280	$     39,37,280	$        6,73,280
	+Depreciation		$     29,98,000	$       29,98,000	$      29,98,000	$     29,98,000	$     29,98,000
	=OCF		$     62,31,280	$   1,01,03,280	$   1,01,03,280	$     69,35,280	$     36,71,280
	Capital expenditure [14800000+190000]	$        1,49,90,000
	Increase in NWC	$              1,90,000	$     30,58,000	$       22,33,000	$                      -	$   -18,27,000	$    -36,54,000
	Recovery of NWC						$        1,90,000
	FCF	$       -1,51,80,000	$     31,73,280	$       78,70,280	$   1,01,03,280	$     87,62,280	$     75,15,280
2]	PVIF at 12%	1	0.89286	0.79719	0.71178	0.63552	0.56743
	PV at 12%	$       -1,51,80,000	$     28,33,286	$       62,74,139	$      71,91,315	$     55,68,587	$     42,64,372	$     2,61,31,699
	NPV	$        1,09,51,699
3]	PI = 26131699/15180000 =	1.72
4]	IRR:
	IRR is that discount rate for which NPV is 0. It has to be found by trial and error by varying the discount rates till 0 NPV results.
	PVIF at 35%	1	0.74074	0.54870	0.40644	0.30107	0.22301
	PV at 35%	$       -1,51,80,000	$     23,50,578	$       43,18,398	$      41,06,398	$     26,38,044	$     16,76,009	$             -90,573
	PVIF at 34%	1	0.74627	0.55692	0.41561	0.31016	0.23146
	PV at 34%	$       -1,51,80,000	$     23,68,119	$       43,83,092	$      41,99,020	$     27,17,678	$     17,39,487	$           2,27,396
	As 0 NPV is got when discount rate is between 34% and 35% IRR also lies between 34% and 35%.
	By simple interpolation IRR = 34%+1%*227396/(227396+90573) =			34.72%
5]	DECISION:
	As the NPV is positive, the investment should be made. Because NPV is positive, PI is greater than 1 and IRR is greater than the required
	rate of return. Hence, the investment is acceptable under the PI and IRR criterial.