80.2K

Verified Solution

Link Copied!

Firm Z has invested $5 million in marketing campaign to assess the demand for the product Minish. This product will be in the market next year and will last five years. Revenues are projected to be $40 million per year along with expenses of $30 million. The firm spends $10 million immediately on equipment that will be depreciated using MACRS depreciation to zero. Additionally, it will use some fully depreciated existing equipment that has a market value of $4 million. Finally, Minish will have no incremental cash or inventory requirements (products will be shipped directly from the contract manufacturer to customers). But, receivables are expected to account for 10% of annual sales. Payables are expected to be 10% of the annual cost of goods sold (COGS) between year 1 and year 4. All accounts payables and receivables will be settled at the end of year 5.

Please use the chart below to:

- find the NPV of the project.

-Identify the IRR of the project.

-Draw NPV vs r graph of the project.

-Will you accpet this project? Why?

MACRS rates (%)
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
	20	32	19.2	11.52	11.52	5.76
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Cash
Inventory
Receivables		$ 4,000,000.00	$ 4,000,000.00	$ 4,000,000.00	$ 4,000,000.00
Payables		$ 3,000,000.00	$ 3,000,000.00	$ 3,000,000.00	$ 3,000,000.00
Net Working Capital
Change in Net Working Capital
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Sales		$ 40,000,000.00	$ 40,000,000.00	$ 40,000,000.00	$ 40,000,000.00	$ 40,000,000.00
Cost of Goods Sold		$ 30,000,000.00	$ 30,000,000.00	$ 30,000,000.00	$ 30,000,000.00	$ 30,000,000.00
Gross Profit		$ 10,000,000.00	$ 30,000,000.00
Selling, General and Administrative Expenses		$ -
Depreciation	$ (10,000,000.00)	$ (2,000,000.00)	$ (3,200,000.00)	$ (1,920,000.00)	$ (1,152,000.00)	$ (576,000.00)
EBIT
Tax
Incremental Earnings
Depreciation
Change in Net Working Capital
Capital Investment
Opportunity Cost
Incremental Free Cash Flow

Answer & Explanation Solved by verified expert

See Answer