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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.