Title: Traid Winds Corporation, a firm in the 34% marginal tax bracket with a 15% required rate of return oPost by: Helper7630 on Jun 7, 2015
help please...
12–17. (Related to Checkpoint 12.1 on page 385) (Comprehensive problem—calculating project cash flows, NPV, PI, and IRR) Traid Winds Corporation, a firm in the 34% marginal tax bracket with a 15% required rate of return or discount rate, is considering a new project. This project involves the introduction of a new product. This project is expected to last 5 years and then, because this is somewhat of a fad project, it will be terminated. Given the following information, determine the net 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. Cost of new plant and equipment: $14,800,000 Shipping and installation costs: $200,000 Unit sales: Year Units Sold 1 70,000 2 120,000 3 120,000 4 80,000 5 70,000 Sales price per unit: $300/unit in years 1–4, $250/unit in year 5 Variable cost per unit: $140/unit Annual fixed costs: $700,000 Working capital requirements: There will be an initial working capital requirement of $200,000 to get production started. For each year, the total investment in net working capital will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. The depreciation method: Use the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 years. Title: Traid Winds Corporation, a firm in the 34% marginal tax bracket with a 15% required rate of return oPost by: psyche360 on Jun 7, 2015
here is an Excel spreedsheet that I hope is correct. Basically we have our outlay of the project of both the 7.9M cost plus shipping, which is depreciated over 5 years. We are also given our Sales and Costs which are based on a variable and fixed basis. We use this plus our tax Rate to solve for Net Income. We get Sales =(Price x Units) then subtract our variable cost and fixed cost and less depreciation. We need remove taxes. To find Cash Flow we mush ADD back depcreciation since it is a NONCASH expense and reduce by working capital. Working capital is returned at the end of the project.
We then use our Excel function to solve for NPV and IRR. a. Capital budgeting equations should always be looked at via Cash flows not accounting profits. Total cash Flow is what matters. b. Depreciation is a NONCASH expense. It reduces taxable income, which reduces taxes and is added back to Cash Flow. c. sunk cost are NOT looked at when examining a capital budeting project. d. initial outlay is the cost of the plant, shipping costs and working capital outlay. This is equal to $8,100,000. e. Cash flows are provided in the diagram. f. Terminal Cash flow is just the last one, or 15,980,000 g. Not sure what this should look like, refer to your book i guess?? h. NPV is 13,269,202 i. IRR is 65.6% j. You should accept this because NPV is positive. k. refer to your book. l. CAPM is only concerned with market risk, since project specific risk (in this case whether the CFs we forecast will come true) is something that a manager can diversify away by investing in multiple projects. m. Simulation basically makes numerous assumptions on things like Sales growth, profit margins, tax rate, and various other inputs to estimate a large amount of potential outcomes. By doing this, the manager can simulate multiple scenarios and see how their investment might pan out. n. Sensitivity analysis is when you hold ALL variables constant (say like sales growth, profits, etc.) and just change ONE variable a little at a time, and see how that affects the projects outcome. You see how sensitivity the project's outcome might be by changing one variable. I know its not complete but hopefully its a start! |