Project Evaluation & Capital Investment
Volume: 52,000 units --- 57,000 units --- 61,000 units
Price: $4.50 per unit --- $4.25 per unit --- $3.85 per unit
Marginal Cost: $3.25 per unit --- $2.50 per unit --- $2.20 per unit
Expected Life of Project: 3 years
Fixed Costs: $14,000 per year
Capital requirement: $100,000 (90% depreciated over the 3-year span)
Market value of equipment in 3 years: $10,000
Charge to Net Working Capital: $30,000 (at t = 0, then recapture at t = 3)
Tax rate: 34%
Risk free rate (3-year): 2.5%
Total Market Return: 9.95%
Project Beta: 2.30
Project Debt/Equity Structure: 0.70
Cost of Debt (pretax): 5.5%
FIND:
1. Project Cash Flow (Use Cash Flow From Assets [CFFA]) in Year 3
2. Project Discount Rate (Hurdle Rate à Use WACC at estimated capital structure))
3. NPV
4. IRR
5. Payback Period
6. Discounted Payback Period
7. Average Accounting Return
8. Profitability Index
9. Do you take this project?