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Solved! Get answer or ask a different Question 8032

A project requires an initial fixed asset investment of $570,000.00, which will be depreciated straight-line to zero over the six-year life of the project.  The pre-tax salvage value of the fixed assets at the end of the project is estimated to be $15,000.00.  Projected sales volume for each year of the project is shown below.  The sale price is $40.00 per unit for the first three years, and $35.00 per unit for years 4 through 6.  A $20,000.00 initial investment in net working capital is required, with additional investments equal to 5% of annual sales for each year of the project.  Variable costs per unit are 55% of the selling price, and fixed costs are $45,000.00 per year.  The firm has a tax rate of 35% and a required return on investment of 12%. Hint: in calculating depreciation, assume the salvage value is zero. However, after-tax salvage value needs to be considered as part of the end of project cash flows.

Year

1

2

3

4

5

6

Sales Volume

10,000

11,000

12,500

15,000

20,000

27,500

a)    Estimate the NPV of the project. Show your work.

b)   What is the additions to NWC during year 1 of the project?

c)    What is the operating cash flow during year 4 of the project?

d)   Would you invest in the project?

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