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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.