You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a 3 year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment in equipment of $165,000 which is depreciated straight-line to zero over the 3 year project life. The actual market value of the equipment at the end of year 3 is $35,000. Initial net working capital investment is $75,000. The tax rate is 35% and the required return on the project is 10%.
a. What is the Total Initial Investment in this project?
Initial investment=cost of equipment+working capital
Initila investment=165,000+75,000
Initial investment=$240,000
b. What is the operating cash flow for the project in year 1?
c. What total amount of terminal value in year 3?
d. Should you accept/reject the project is you use the NPV method?