You are asked to analyse the following project:
Initial investment:
Equipment: $3,500,000
Initial net Working capital 10% of first year sales
Operating results
Year 1 Year 2 Year 3 Year 4 Year 5
$4,000,000 $5,000,000 $5,000,000 $5,500,000 $5,000,000
Variable costs: 60% of sales
Fixed costs: $500,000
Annual depreciation charge for equipment: $400,000
Investment in net working capital: 10% of next year increase in sales.
Taxes: 30%
Cost of capital: 10%
The project ends at the end of the 5th year. The net working capital is
recovered at the end of the project.
The net salvage value of assets at the end of the project is $1,500,000
Required:
Question 1: Estimate the project's cash flows
Question 2: Using the payback period, the discounted payback period, the net present value and the profitability ratio, assess the project and present your conclusion.