II: Capital Budgeting Cash Flows, Depreciation Methods, NPV and IRR

The manager for Blooper Industries has the following information about a new product proposal. The product, Product-X, already undergone market research tests for a cost of $5 million, is seen to have good potentials. As a result, the manager has requested and received further information, mostly estimates, about Product X, as follows:

1. Product X's life is expected to be five years.
2. It requires an initial cash investment outlay of $10 million, depreciated on a straight-line basis over the next five years. Salvage value at the end of year five is zero.

3. The project will require Blooper to invest $2 million in working capital in year zero, which can be recovered fully at the end of project (year 5).

4. The firm's marginal tax rate is 40 percent; the opportunity cost of capital is 16 percent.

5. Cash revenues and cash operating expenses for the next five years are expected to be

Year 1 Year 2 Year 3 Year 4 Year 5

Cash revenues $15,000,000 $16,500,000 $18,150,000 $19,965,000 $21,962,000

Cash operating exp. 10,000,000 10,500,000 11,025,000 11,576,000 12,155,000

REQUIRED: Part a-d

Ignore the cost of market research ($5 million) and answer the following questions.

A suggested solution format is attached. The colored cells need to be filled w/ appropriate figures.

1. Prepare an income statement for the 5-year period. (Sales Expenses Dep. - Taxes = Net Inc.).
   1. Find the cash flows for each year. Two ways to get annual cash flows. They give the same answer: Net Inc. + Dep.