A project requires an initial fixed asset investment of $570,000.00, which will be depreciated straight-line to zero over the six-year life of the project. The pre-tax salvage value of the fixed assets at the end of the project is estimated to be $15,000.00. Projected sales volume for each year of the project is shown below. The sale price is $40.00 per unit for the first three years, and $35.00 per unit for years 4 through 6. A $20,000.00 initial investment in net working capital is required, with additional investments equal to 5% of annual sales for each year of the project. Variable costs per unit are 55% of the selling price, and fixed costs are $45,000.00 per year. The firm has a tax rate of 35% and a required return on investment of 12%. Hint: in calculating depreciation, assume the salvage value is zero. However, after-tax salvage value needs to be considered as part of the end of project cash flows.
Year
1
2
3
4
5
6
Sales Volume
10,000
11,000
12,500
15,000
20,000
27,500
a) Estimate the NPV of the project. Show your work.
b) What is the additions to NWC during year 1 of the project?
c) What is the operating cash flow during year 4 of the project?
d) Would you invest in the project?