introduction of a new product. The project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. Given the information in the popup window, E, determine the free cash flows associated with the project, the project's net present value, the profitability index, and the internal rate of return. Apply the appropriate decision criteria.
introduction of a new product. The project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. Given the information in the popup window, E, determine the free cash flows associated with the project, the project's net present value, the profitability index, and the internal rate of return. Apply the appropriate decision criteria.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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(Comprehensive problem) Traid Winds Corporation, a firm in the 34 percent marginal tax bracket with a required rate of return or cost of capital of 15 percent, is considering a new project. This project involves the
introduction of a new product. The project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. Given the information in the popup window, , determine the free cash
flows associated with the project, the project's net present value, the profitability index, and the internal rate of return. Apply the appropriate decision criteria.
a. What is the initial outlay associated with this project?
$
(Round to the nearest dollar.)
Get more help.
Data table
(...)
Cost of new plant and equipment
Shipping and installation costs
Unit sales
Sales price per unit
Variable cost per unit
Annual fixed costs
Working-capital requirements
Depreciation method
$14,800,000
$200,000
YEAR
1
2
3
4
5
UNITS SOLD
70,000
120,000
120,000
80,000
70,000
$300/unit in years 1 through 4, $250/unit in year 5
$140/unit
$700,000 per year in years 1-5
There will be an initial working-capital requirement of
$200,000 just to get production started. For each year,
the total investment in net working capital will be equal
to 10 percent of the dollar value of sales for that
year. Thus, the investment in working capital will
increase during years 1 and 2, then decrease in year
4. Finally, all working capital is liquidated at the
termination of the project at the end of year 5.
Use the simplified straight-line method over 5 years.
Assume that the plant and equipment will have no
salvage value after 5 years.
X
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