1. You are evaluating a small project for your company. The idea is to introduce a new, but short lived, new product. The project has a 5 year expected life. Equipment costing $2 million is required, and it will require $500 thousand to deliver and install the equipment. Net working capital of $700 thousand will be required to begin the project, and will be returned at the end of the project. Sales over the 6 year useful life of the project will be 100,000 units each year. The price is expected to be $25 per unit. Costs are expected to be $15 per unit each year. At the end of the project’s useful life, the equipment will be sold for $500,000. The equipment qualifies for MACRS 7 year asset depreciation. The tax rate is 40%, and your cost of capital is 14%. What is the NPV of the project? What is the Profitability Index? Calculate the MIRR. Calculate the IRR. Calculate Payback using Excel. Should the project be accepted? Use Excel for this problem.
2. You are evaluating a project for your company that has an open ended (perpetual) life. Cash flow in year one is expected to be $60,000, and this cash flow is expected to grow at a rate of 5% per year for 5 years. After this initial 5 year period, your expectations are that the cash flows for the project will remain constant. The initial investment for the project is expected to be $350,000. Your cost of capital is 12%. Using this information, calculate the NPV for the project. Calculate the IRR. Is it acceptable? Use Excel for this problem.