FIN - Capital Budgeting Assignment Solution................................................................
Question;Assignment 1 (CB): Project Q involves purchase of machinery which will support production of a new product. If the machine is purchased, we expect to sell 5,500 units per year for FOUR years at a price of $1275 per unit. Variable Costs to produce each unit are estimated to be $ 475.Fixed manufacturing and overhead costs are estimated at $635,000 per year.The machinery will cost $1,325,000, which cost will be depreciated for TAX PURPOSES as a seven year MACRS asset. Company management believes that the machinery can be sold for $500,000 at the end of the project.Producing the new product will require an initial (Yr0) investment in Net Working Capital (NWC) of $ 1,100,000. During the project life annual NWC requirements are expected to be 25% of Sales. The company expects to recover 60% of its NWC project investments at the end of the project.Assume a 40% aggregate tax rate and a required rate of return of 20%. Should the company undertake this project?First prepare a Depreciation Schedule:YrDepreciation Expense1234Next prepare projected Annual Income Statements:Yr1Yr2SalesVCFCEBITDADepnEBITTaxes @ 40%NICalculate OCF:NI+DepnOCF1Book ValueYr3Yr4Non-operating CFs:NWC Yr0NWC Yr4CAPEX (Capital Spending)(CS):CS Yr0CS Yr4 (consider After-tax Salvage Value)Total Cash Flows (TCFs)Yr0OCFCSNWCYr1TCFWhat is the project?s Payback (PB) period?What is the project?s Net Present Value (NPV)?What is the project?s IRR?2Yr2Yr3Yr4
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