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IDG is a venture capital fund, based in VN. Currently, this company has access to a...

IDG is a venture capital fund, based in VN. Currently, this company has access to a list of “potential venture projects”. As the fund’s financial analyst, given the following information for project X, should the fund undertake this venture? To answer, first prepare a pro forma income statement for each year. Next calculate operating cash flow (OCF). Finish the problem by determining total project cash flows for each year and then calculating NPV assuming a 28% required return. Tax rate is 34%.

Project X involves a new type of graphite composite in-line skate wheel. Projected sales volume is 6,000 units per year at $1,000 each. Variable cost will run about $400 per unit, and the product should have a four year life.

Fixed cost for the project will run $450,000 per year. Further, the project will need to invest a total of $1,250,000 in manufacturing equipment. This equipment is depreciated under seven-year MACRS property for tax purposes. By the end of the 4th year, the equipment would be sold on the market for half of its original price. Initial net working capital needed is $1,150,000. After that, net working capital requirements would be 25% of sales.

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