Question

5-year project to improve its sales channels. goods to customers will increase sales $40,000 Question 3 (28 pts): Your firm is considering a new truck for $120,000 to deliver more C a new Buying and costs of goods sold $15,000 per year. The cost of the truck will be paid in 2 equal installments. The first installment will take place at the time of the purchase and the second installment will be paid at the end of year 1. The truck will be depreciated straight-line to zero at the end of year 5. Your company will be able to sell the truck for $10,000 when the project is completed. Your company will be able to reduce working capital by $50,000 at the beginning of the project. The tax rate is 20 %. a. Please compute the free cash flows for the next 5 years. (20 pts) b. When you look at the free cash flows generated from this project, what would you say about this project? Is IRR criterion reliable for this project? Why? (Please do not make any calculations). (8 pts) 2

Answer 1

nok1 xlsy Micro ? X File Home Insert Page Layout Formulas Data Review View Cut - AutoSum General АА Wrap Text Calibri 11 Fill Copy A Merge & Center Paste S % Conditional Format Cell Insert Delete Format Sort & Find & BIU 2 Clear Format Painter er Select Formatting ble Styles Clipboard Font Alignment Number Shules Cells Editing 111 Formula Bar G M B C J N C A year3 year4 calculation depreciation 1. yearl year2 years ase in sales 000 000 000 000 000 120000 asset 2. COGS 15000 15000 15000 15000 15000 value л gross profit 25000 25000 25000 25000 25000 time period depreciation per year depreciation 24000 24000 24000 24000 24000 24000 6 ЕВT 1000 1000 1000 1000 1000 less: tax@20 % 7 -200 -200 200 200 -200 add: depreciation 8 24000 24000 24000 24000 24000 installments paid for machinery -60000 -60000 9 less: CAPEX 0 LESS: change in WC 10 50000 change in WC is negative hence it is added is FREE CASH FLOW 24800 24800 24800 11 14800 -35200 total cash flow 12 54000 terminal cash flow 10000 13 total 64000 14 15 16 19 20 21 22 23 24 25 4 HSheet2Sheet3Sheet4Sheets Sheet6 Sheet7 Sheet8 Sheet9 Sheet10 Sheet11 Sheet12 100% Ready ENG 3:21 PM INTL 6/18/2019

yes the project is feasible as it generates substantial cash flow from the investment though first year and second year are inconsistent because of instalments payment and working capital transactions

yes IRR is the reliable criteria for evaluating the investment decision as the cash flows are irregular or inconsistent for first and second year in relation to other years of operations, hence IRR is most reliable as it calculates the internal rate of return of the project as a whole period of operations