Net present value of this project:
- The following I/S is based on the information associated with a new project. Answer the questions.
Projected Income Statements
|
|
|
Year
|
|
|
|
|
1
|
2
|
3
|
4
|
|
Sales
Variable Cost
Fixed Cost
Depreciation
EBIT
Taxes (40%)
Net income
|
9,000,000
5,000,000
2,500,000
500,000
1,000,000
400,000
600,000
|
9,000,000
5,000,000
2,500,000
500,000
1,000,000
400,000
600,000
|
9,000,000
5,000,000
2,500,000
500,000
1,000,000
400,000
600,000
|
9,000,000
5,000,000
2,500,000
500,000
1,000,000
400,000
600,000
|
|
|
|
|
|
|
1) We plan to invest $2,000,000 to get started. In four years, the new equipment will be sold for $100,000. However, its book value will be $0. The tax rate is 50%. Moreover, we can save NWC by $100,000 at the beginning of the life of this project. Fill the blanks in the following projected cash flow table.(60points)
Projected Cash Flows
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|
|
|
Year
|
|
|
|
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0
|
1
|
2
|
3
|
4
|
|
OCF
Changes in NWC
Capital spending
|
( )
-2,000,000
|
( )
|
( )
|
( )
|
1,100,000
( )
( )
|
|
Total Cash Flow
|
( )
|
( )
|
( )
|
( )
|
( )
|
2) Figure out the net present value of this project if the required return is 25%. Based on the NPV, do you accept or reject this project? Based on the NPV, is the internal rate of return (IRR) for this project greater or less than the required return of 25%? (You don't have to figure out the IRR. Please think about the relationship between NPV and IRR)