GetItNow Inc. is considering investing in a new project that would use drones to deliver products on very short notice. They have just concluded a one-year study, at a cost of $1 million, to assess the feasibility of the technology and the market readiness for this premium service. The project is expected to generate revenues of $30 million per year over the next 4 years (starting in Year 1). The type of drones that are required are quite sophisticated and require a large amount of customization to accommodate the heavy payload and durability requirements. Because of these custom requirements, the drones themselves must be manufactured in one production run and so all the drones will be purchased immediately at a total cost of $24 million. They are expected to have a 4-year life with no resale value at the end of their lives. This capital investment can be depreciated straight line, over 4 years, starting in Year 1. 

GetItNow is already a successful delivery service with in-house inventory management, scheduling, and tracking system that can easily accommodate the drone project without impacting current business. Thus, they do not foresee any additional expenditures on this system. The system is state-of-the-art and new. It was purchased the last year for $10 million and costs $1 million a year to maintain. The costs associated with operating the drones are expected to be 40% of revenues. In addition, executives believe that a new specialized sales force and advertising campaign would be needed to sell the service. The cost of the sales team and marketing will be $4 million per year. 

As a delivery service business, inventory requirements are nil. Because most customers pay at the time of delivery, accounts receivable will average only 2% of current annual sales. Accounts payable are expected to average 10% of annual operating and sales costs. The company expects these accounts will be fully resolved one year after the conclusion of the project. The corporate tax rate is 40%. The riskiness of the project matches the riskiness of the firm. The firm has a beta of 1.2, and the current risk free interest rate is 2%. The market risk premium is 5%. 

a) Calculate the incremental revenue, EBIT and NOPAT of the project. 

b) What are the net working capital requirements of the project? 

c) Calculate the project's free cashflows d) (10 points) Calculate the NPV of the project. Should the firm invest?

Answer rating: 100% (QA)

Question a Revenues 30M EBIT 8M NOPAT 48 M b 1000000 c 0 1 2 3 4 5 After Tax Cash ... View the full answer