Question

1) Your company, International Widget Manufacturers, is headquartered in New Orleans, but is considering expanding its operations to the west coast. It will cost $10 million to build a plant in California to make widgets, but if you do, you will be able to sell 1.5 million widgets per year for the next ten years. The project ends at that time. During the first year, your widgets will be priced at $1.00 each. They will cost 30 cents each to make. Both the price of the widgets and their cost of production are expected to increase at the rate of 3 percent per year over the next ten years. This is also the expected rate of inflation. The cost to build the plant will be fully expensed in the year it is built. IWM is in the 21 percent marginal tax bracket, and its cost of capital is 13%. What is the NPV of this project

2)

1. Sam's Inc. is considering an investment of $250,000 in an asset with an economic life of five years. The firm estimates that the annual cash revenues and expenses at the end of the first year will be $200,000 and $100,000, respectively. Revenues are expected to grow thereafter at a rate of 5 percent per year while expenses are expected to grow by 3% per year. Sam's Inc will use the straight-line method to depreciate its asset to zero over five years. There is no salvage value. A net working capital investment of $10,000 is required immediately, along with an additional $5,000 at the end of the first year. They will both be recovered at the end of the project. Sam's Inc has a marginal tax rate of 21%. What is the IRR of the project?

Answer 1

A)

classmate Date Page (A) Initial qumestment is $10M. Nomble of cruits sold is constant @ 1.5 units in Price per unit is $1 which increases by 3% s frery year hence V Year 1 ! Price pa unit is $1 na Thar 2 is $1(1+0.03)21.03 illeai 3 - 'is 31.03(14.03124.06. Cost of product per vits ou $0.3 which increases Ibu 31. every yeau hence Year 10 cost of product pu chit in $0.3 Micul 2 - w $0.3(1+.03)0.31 Geall 3: is $0.31 (17.03)20.32 Arotit per hit is Idru pe nuit - cost of product pu mit lielvear 1: Monit pu shit al-0. 32$ 0.7 Mai 2: 21.03-0.312 0.12 L& 50 out Portafit befien tad a profit s onit x no. of ouit so Year 1 2 6 0.7 x 115 M 2 8 0 1.05 M. Mear 2 2 $ 0.72x1.5M 2 A 1.08m and so on Propt atter tan fritit before tax x (121) 2 grott betou tad X .79. 1 Pront atur tax a 105 .7923.83 M

classmate Date page and 80 ani Disifont factor her Year 1 ? Vit3_2 .88 Mae 27 71.13110. and so on. Call late the resund value her. respecue years by multiphing Ducount facta x fritid apu tas. and sunnung up the same with I Enihal muestreut of $10M I inlinus' sign for outflow) ques" NPV of $-4.99 milliau amScanner

1 2 3 4 5 6 7 8 9 10 -10 1.5 1.5 1.5 1.06 0.32 1.5 1 0.3 0.70 1.05 1.5 1.13 0.34 1.23 Year Investments (in Million $) Number of unit sold (in Million units) Price per unit ($) Cost of production ($) Profit per unit ($) Profit before tax (Million $) Income after tax (Million $) Discount factor Present value (Million $) 1.5 1.27 0.38 0.89 0.74 0.79 1.5 1.03 0.31 0.72 1.08 0.85 0.78 0.67 1.5 1.16 0.35 0.81 1.22 0.96 0.48 0.46 1.09 0.33 0.76 1.15 0.91 0.61 0.56 1.5 1.19 0.36 0.84 1.25 0.99 0.43 0.42 1.5 1.30 0.39 0.91 1.37 1.08 0.29 0.32 1.11 0.88 1.33 0.37 0.86 1.29 1.02 0.38 0.38 1.18 0.93 0.54 0.51 0.83 0.69 0.88 0.73 1.05 0.33 0.35 0.61

B)

classmate (Jл ране . hanithal muestment is 4250,000 2 -л-ма огръ0 % чия 4 9 Итали. ) за -ТВ, ръъ 2 - Soъъ е им с JлJLA shich it onstained ad years ie at the end of the project. I Total sales for year of is 42,00ooo with 5% growth le real : sales $200.000 Ч«Ак : Solo + 2, ,0pp ( -4-0.05) ф -, 10, DVD L and so on 04. Арх4 ox ЯАХ “ Ф А, DP, УТо $7. eдoхои та и му слот, , съ Карл 2: Pixa C1, 0, 0(1+ О.03) and so on . proft before tas? Thal sales - Istal expense To || Чух 1 п hDO, OTP- 1 то, бър " ( , , БИР ч с у усах 2 2,10, ГҮр - 1,03, от 121 , Утъ І . Ро со том аһ се(ил Тал е и. 8 а | Ч АА 1 И 6р. 60 х ((-0.1)Әсур на | ЧС 2 2 1 ба 01 (co.д) тү59ь Bosants and so on.

Classmate C ) Date. Doge Adding all cash inflows a lithows we get cangrow of propet is using -CFot cft cf2 (ntne 11+ list can be solved by hit or error D ei by Aunctions using incel BA TI plus. Scanned with Gone Scene

Year Investments ($) Working capital ($) Total Sales ($) Expense ($) Profit before tax ($) Income after tax ($) Cash flows ($) 1 -2,50,000.00 -10,000.00 -5000 200000 210000 100000 103000 100000 107000 79000 84530 -2,60,000.00 '74,000.00 84,530.00 21.08% 15000 220500 231525 243101.25 106090 109272.7 112550.881 114410 122252.3 130550.369 90383.9 96579.317 103134.7915 90,383.90 96,579.32 1,18,134.79 IRR