Mark McNibble is CFO for McNabb Fabrications, Inc. Mark is considering a new project that involves the
Question:
Mark McNibble is CFO for McNabb Fabrications, Inc. Mark is considering a new project that involves the introduction of a new product. McNabb is in the 34 percent marginal tax bracket has a 15 percent required rate of return or discount rate for new investments. The new project is expected to last five years, and then, because this is somewhat of a fad product, it will be terminated. Given the following information, determine the net cash flows associated with the project and the project's NPV, profitability index, and internal rate of return. Apply the appropriate decision criteria.
Cost of new plant and equipment: $198,000,000
Shipping and installation costs: $2,000,000
Unit sales:
Year _________________________ Units Sold
1......................................1,000,000
2......................................1,800,000
3......................................1,800,000
4......................................1,200,000
5...................................... 700,000
Sales price per unit: $800/unit in Years 1-4, $600/unit in Year 5
Variable cost per unit: $400/unit
Annual fixed costs: $10,000,000
Working-capital requirements: There will be an initial working-capital requirement of $2,000,000 just to get production started. For each year, the total investment in net working capital will equal 10 percent of the dollar value of sales for that year. Thus,
Discount RateDepending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
Step by Step Answer:
Financial Management Principles and Applications
ISBN: 978-0134417219
13th edition
Authors: Sheridan Titman, Arthur J. Keown, John H. Martin