Question

2. Pointless Luxuries Inc. (PLI) produces unusual gifts targeted at wealthy consumers. The company is analyzing the introduction of a new device designed to attach to the collar of a cat or dog. The product contains a GPS, an audible that can be triggered remotely, and an automatic emergency K-911 number that is called if the animal is injured. PLI estimates that developing this product will require up-front capital expenditures of $10 million, costs that will be depreciated on a straight-line basis to zero over five years. However, PLI estimates they could sell the equipment at the end of five years for $3,000,000. The project would use an existing warehouse that you own that is currently rented out to a neighboring firm. Next year's rental charge on the warehouse is $200,000 and the rent is expected to grow at 4% a year. PLI believes that it can sell the product initially for $170. The selling price will increase to $190 in years 2 and 3 before falling to $170 and $150 in years 4 and 5, respectively. After five years the company will withdraw the product from the market and replace it with something else. Variable costs are $75 in year 1 and increase at an annual rate of 10%. PLI forecasts volume of 25,000 units the first year with subsequent increases of 25% (year 2), 20% (year 3), 20% (year 4), and 15% (year 5). Offering this product will force PLI to make additional investments in receivables and inventory. Projected end-of-year balances appear in the following table. SO $100,000 $150,000 $200,000 $100,000 Year Accounts Receivable Inventory $0 $300,000 $350,000 $400,000 $200,000 $0 The firm faces a tax rate of 34%. a. b. Calculate the project's cash flows each year. Calculate the NPV assuming a 10% opportunity cost of capital. What is the cost of capital is 15%? What is the IRR of the investment?

Please answer all parts of the question. Thank you!

Answer 1

Initial investment	10000000	$
life	5	year
Value at t=5	3000000
	year	0	1	2	3	4	5
	selling price/unit		170	190	190	170	150
	units sale		25000	31250	37500	45000	51750
	Variable cost/unit		75	82.5	90.75	99.825	109.8075
	Rent		-200000	-208000	-216320	-224973	-233972
	Initial investment	10000000	0	0	0	0	0
Answer
a	EBITDA		2375000	3359375	3721875	3157875	2079962
	Less:Depreciation		2000000	2000000	2000000	2000000	2000000
	EBT		375000	1359375	1721875	1157875	79961.87
	EAT		247500	897187.5	1136438	764197.5	52774.84
	Add:Depreciation		2000000	2000000	2000000	2000000	2000000
	Changes in WC	0	-400000	-100000	-100000	300000	300000
	Opportunity cost		-20000	-20800	-21632	-22497.3	-23397.2
	Sale of device		0	0	0	0	3000000
	FCF		1827500	2776388	3014806	3041700	5329378
answer b	Present valu factor	0.8696	0.7561	0.6575	0.5718	0.4972
	PV	-10000000	1589130.435	2099348	1982251	1739108	2649586
	NPV	59423.61
Answer c	IRR (%)	15.20