Question

% P12-22 (similar to) 18 Question Help (Related to Checkpoint 12.1) (Comprehensive problem-calculating project cash flows, NPV, PI, and IRR) Traid Winds Corporation, a firm in the 33 percent marginal tax bracket with a required rate of return or discount rate of 12 percent, is considering a new project. This project involves the introduction of a new product. The project is expected to last 5 years and then, because this is somewhat of a fad product, it will be terminated. Given the following information, E::, determine the free 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. a. Determ X A Data Table The FCF Cost of new plant and equipment: Shipping and installation costs: Unit sales: $14,200,000 $180,000 Year Units Sold 80,000 115,000 115,000 90,000 80,000 Sales price per unit: Variable cost per unit: Annual fixed costs: Working-capital requirements: Enter your $290/unit in years 1 through 4. $240/unit in year 5 $120/unit $600,000 There will be an initial working capital requirement of $160,000 to get production started. For each year, the total investment in net working capital will be equal to 12 nercent of the dollar value of sales for that year 9 parts Check Answer remain

Answer 1

Initial Investment = Cost of new plant + shipping & installation + working capital

= 14200000+180000+160000 = $14,540,000

NPV = Sum of PV of cash flows - initial investment = 48640984.7 - 14540000 =$34,100,984.7

Years Units Sold Selling Price Sales(units*price) Working Capital Required(sales*0.12) Increase in Working Capital(required-exi sting) 80000 290 23200000 2784000 115000 290 33350000 4002000 115000 290 33350000 4002000 90000 290 26100000 3132000 80000 240 19200000 2304000 2624000 1218000 -870000 -828000 4 23200000 9600000 13600000 600000 2876000 10124000 3340920 6783080 2876000 33350000 13800000 19550000 600000 2876000 16074000 5304420 10769580 2876000 33350000 13800000 19550000 600000 2876000 16074000 5304420 10769580 2 876000 26100000 10800000 15300000 600000 2876000 1 1824000 3901920 7922080 2876000 5 19200000 9600000 9600000 600000 2876000 6124000 2020920 4103080 2876000 Sales Variable Cost(units*120) Contribution (sales-variable cost) Fixed Cost Depriciation[(14200000+180000)/5] EBIT(contribution-fixed cost) Tax(EBIT*0.33) Earnings after Tax Depreciation Working Capital requirement(negative s are refund) Cash Flows(earnings+depreciation-work ing capital) Working capital refund(at the end of 5t h year) Net Cash Flows Discouniting Factor[1/(1.12)"year] Present Value(net cash flow discountin g factor) 2624000 1218000 -870000 -828000 703508012427580 1364558011668080 7807080 7035080 0.892857143 124275801364558011668080 0.797193878 0.711780248 0.635518078 19200000 27007080 0.567426856 6281321.429 9907190.689 9712654.314 7415275.781 15324542.491 48640984.7 Year 1 2 Cash Flows 0 -14540000 7035080 12427580 3 13645580 4 11668080 5 27007080 0.698828969 IRR=

PI = Sum of PV of cash flows/Initial investment = 48640984.7/14540000 = 3.3453

IRR IS CALCULATED IN EXCEL USING DIRECT FORMULA.