a) If a project is undertaken, at t = 0 the company will require to increase its inventories by $50,000, and its accounts payable will increase by $10,000. This net operating working capital will be recovered at the end of the project’s life (t = 4).
b) If a project is undertaken, the company will realize the extra $600,000 in sales over each of the next four years (t = 1, 2, 3, and 4). The operating costs of company (not including depreciation) will equal $400,000 a year.
c) The tax rate of company is 40%.
d) Economic life the project is complete at t = 4, but it will have the salvage value (before-tax) of $50,000.
e) The project’s WACC is 10%.
f) Company is very profitable, so any accounting losses on this project can be used to decrease overall tax burden of company.
1) Determine the project’s net present value (NPV)? What does it mean?
2) What is the IRR of the project? What does it imply?
3) If the sales figure has plus or minus 5% movement and operating cost has about 6% plus or minus changes, what must be the investment decision in best case scenario?
4) If sales figure has a plus or minus 5% movement, and the operating cost has about 6% plus or minus changes, what must be the investment decision in worst case scenario?
5) If an alternative of project offers and overseas investment opportunity for 4 years with 12% return and at present has an exchange rate as 1$USD = .95 foreign dollar and dollar depreciates at a rate of 5% every year, must Carlos company select the alternative investment?