Problem
You are evaluating a project for a superior pickleball paddle. The company has spent $65,000 on pickleball market research. You estimate the sales price for a superior paddle to be $200 per unit and sales volume to be 1,000 units in year 1; 1,200 units in year 2; and 1,100 units in year 3. The project has a three-year life. Variable costs amount to $50 per unit and fixed costs are $75,000 per year. The project requires manufacturing equipment with a cost of $140,000; Installation of the equipment will cost an additional $10,000. The company can use bonus depreciation. The salvage value of the equipment at the end of year 3 is expected to be $5,000. It is expected that sales of the superior pickleball paddle will decrease sales of existing paddles by $20,000 per year. NWC levels (balances) at the beginning of each year will equal 20 percent of the projected sales during the coming year; for example, year 0 NWC equals 20% of year 1 sales. If the company invests in the project, it will need to get a loan that will require interest payments of $9,000 each year. The tax rate is 21 percent and the cost of capital on the project is 10 percent.
• A schedule that includes subtotals for EBIT, net income, OCF and Free Cash flows.
• Calculate NPV, IRR, and payback. For each calculation state whether to accept or reject the project. Assume management's maximum payback period is set at 2.75 years.