Windex Corporation, a firm in the 38 percent marginal tax bracket with a 17.5% required rate of return or cost of capital, is considering a new project. This project involves the introduction of a new product. This project is expected to last five years and then, to be terminated (the salvage value is realized at the end of year 5). Given the following information, 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.
Cost of new plant and equipment: $18,800,000
Shipping and installation costs: $ 300,000
Year Units Sold
Price per unit: $310/unit in years 1-3
$275/unit in year 4-5
Variable cost per unit: $145/unit
Annual fixed costs: $850,000
Salvage Value of Plant and Equipment: $2,700,000
Working-Capital Requirements: There will be an initial working-capital requirement of $250,000 just to get production started. For each year, the total investment in net working capital will be equal to 8 percent of the dollar value of sales for that year. All working capital is liquidated at the termination of the project at the end of year 5.
Depreciation Method: Investments qualify for the 5-year MACRS (Modified Accelerated Recovery System) class.