Fashion Corp. has come up with a new product. One year ago, the company paid $100,000 for a marketing survey to determine the viability of this product. It is estimated that the product will generate sales of $600,000 per year for the next 4 years (= project life). The fixed cost associated with this product will be $300,000 per year, and the variable cost will amount to 20 percent of annual sales. To produce the product, the company needs to buy a fixed asset that costs $360,000, which will be fully depreciated by the straight line method over 6 years. It is estimated that the fixed asset will have a salvage value of $160,000 at the end of the project. It is also estimated that the project will need the working capital investment (= 10%*annual sales) in the beginning of each year. Assume that the tax rate is 30%. Management of Fashion Corp. has determined that 10% is an appropriate discount rate, given the risk of this project
a. In Excel, work out the annual pro forma income statement, the depreciation schedule for Years 0-6, and the book value of the fixed asset for Years 0-6.
b. Work out the projected net working capital requirements in Excel for Years 0-4.
c. Work out the projected operating cash flows in Excel for Years 0-4.
d. Calculate the after-tax salvage value of the fixed asset in Year 4.
e. Calculate the net cash flow for Years 0-4.
f. Calculate the payback (PB) period. Should we accept the project?
g. Calculate the NPV. Should we accept the project?
h. Calculate the IRR. Should we accept the project?