Your company is considering an investment in a new product. The new product has been developed with a total cumulative investment of 2.5 million. To initiate the product from this point in time, a 1.5 million investment will be required. In addition, $250,000 of working capital must be added right away. Free cash flow from the project will be $300,000 the first year. Each successive year, the FCF will be 10% higher, but no additional working capital will be required. At the end of 10 years, the investment will have no value and the $250,000 of working capital will be returned to the company.
a. Construct a cash flow timeline appropriate for the investment decision.
b. What is the payback?
c. If the WACC is 10%, what is the NPV?
d. What is the IRR?