You are analyst of a company and required to provide recommendation on new project. * Show all working The R&D cost done is $100 million. Product can be put of market beginning of next year (Year 1) and company expect it to stay on market for 5 years.(from year 1 - year 5) The Intial Investment occurs immediatedly (year 0) and operation cash flows at beginning of next year. (Year 1) Company must Intially invest $ 10 million in production equipment. This quipment can be sold at $6 million at the end of year 5. Company except to Sale for $100 per unit, variable cost is $55. Marketing and Advertising cost is $30 million in the first year. Both Selling and cost (variable and marketing) are expected to increase at the inflation rate in the subsequent years. (year2 - 5) Corporate rate is 43.5% and Inflation rate 4.75% constant over the life of Project. Floowing Sales Target are First year- 50 Million,Second year 40 Million and 30 Million for year 3 - 5. Equipments are depreciated in Straight Line method over 5 Years to Zero balance. The Immediate initial working capital requirement is $10 million in year 0 and at the end of year5, company will get all working capital back. Assume 10% discount rate is appropriate. Questions:- 1 a) Calculate the incremental free cash flow during the project's life (starting from Year 0 to Year 4). Show workings. b) Calculate the NPV, payback period and IRR of the project. Should the project be accepted based on NPV rule? Show workings and explain your answer(s).
You are analyst of a company and required to provide recommendation on new project. * Show all working The R&D cost done is $100 million. Product can be put of market beginning of next year (Year 1) and company expect it to stay on market for 5 years.(from year 1 - year 5) The Intial Investment occurs immediatedly (year 0) and operation cash flows at beginning of next year. (Year 1) Company must Intially invest $ 10 million in production equipment. This quipment can be sold at $6 million at the end of year 5. Company except to Sale for $100 per unit, variable cost is $55. Marketing and Advertising cost is $30 million in the first year. Both Selling and cost (variable and marketing) are expected to increase at the inflation rate in the subsequent years. (year2 - 5) Corporate rate is 43.5% and Inflation rate 4.75% constant over the life of Project. Floowing Sales Target are First year- 50 Million,Second year 40 Million and 30 Million for year 3 - 5. Equipments are depreciated in Straight Line method over 5 Years to Zero balance. The Immediate initial working capital requirement is $10 million in year 0 and at the end of year5, company will get all working capital back. Assume 10% discount rate is appropriate. Questions:- 1 a) Calculate the incremental free cash flow during the project's life (starting from Year 0 to Year 4). Show workings. b) Calculate the NPV, payback period and IRR of the project. Should the project be accepted based on NPV rule? Show workings and explain your answer(s).
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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Transcribed Image Text:You are analyst of a company and required to provide recommendation on new project. * Show all working The R&D cost done is $100
million. Product can be put of market beginning of next year (Year 1) and company expect it to stay on market for 5 years.(from year 1 -
year 5) The Intial Investment occurs immediatedly (year 0) and operation cash flows at beginning of next year. (Year 1) Company must
Intially invest $ 10 million in production equipment. This quipment can be sold at $6 million at the end of year 5. Company except to
Sale for $100 per unit, variable cost is $55. Marketing and Advertising cost is $30 million in the first year. Both Selling and cost (variable
and marketing) are expected to increase at the inflation rate in the subsequent years. (year2 - 5) Corporate rate is 43.5% and Inflation rate
4.75% constant over the life of Project. Floowing Sales Target are First year- 50 Million,Second year 40 Million and 30 Million for year 3 - 5.
Equipments are depreciated in Straight Line method over 5 Years to Zero balance. The Immediate initial working capital requirement is
$10 million in year 0 and at the end of year5, company will get all working capital back. Assume 10% discount rate is appropriate.
Questions:- 1 a) Calculate the incremental free cash flow during the project's life (starting from Year 0 to Year 4). Show workings. b)
Calculate the NPV, payback period and IRR of the project. Should the project be accepted based on NPV rule? Show workings and
explain your answer(s).
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