Question

(Related to Checkpoint 12.1) (Comprehensive problem-calculating project cash flows, NPV, PI, and IRR) Traid Winds Corporation, a firm in the 31 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, , 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

Traid Winds	0	1	2	3	4	5
Unit sales		85,000	135,000	135,000	95,000	85,000
Price per unit		340	340	340	340	290
Investment	-14,580,000
NWC	-220,000	-2,959,000	-1,870,000	0	1,496,000	3,553,000
Sales		28,900,000	45,900,000	45,900,000	32,300,000	24,650,000
VC		-15,300,000	-24,300,000	-24,300,000	-17,100,000	-15,300,000
FC		-750,000	-750,000	-750,000	-750,000	-750,000
Depreciation		-2,916,000	-2,916,000	-2,916,000	-2,916,000	-2,916,000
EBT		9,934,000	17,934,000	17,934,000	11,534,000	5,684,000
Tax (31%)		-3,079,540	-5,559,540	-5,559,540	-3,575,540	-1,762,040
Net Income		6,854,460	12,374,460	12,374,460	7,958,460	3,921,960
Cash Flows	-14,800,000	6,811,460	13,420,460	15,290,460	12,370,460	10,390,960
NPV	$26,621,577.40
IRR	65.85%
PI	2.83

NWC = 11% x Sales - Total NWC in previous years.

Depreciation = Investment / 5

Cash Flows = Investment + NWC + Net Income + Depreciation

NPV and IRR can be calculated using the same function on a calculator or excel.

PI = 1 + NPV / Investment