The firm Gelati-Banking (GB) is considering a project with the following characteristics.

- Sales will be $100 MM for sure in the first year and grow 10% in the second year; thereafter, the long term growth rate is 3%. Gross Profit Margin (Gross Profit over Sales) will be 20%.

- Depreciation will be $10 MM each year for the next two years. The Corporate Tax Rate is 40%.

- Working Capital held for the project will have to be 10% of sales. Additional CAPX each year will be $11MM in year 1 and $12 MM in year 2.

- All cash flows defined here are deterministic and will go on indefinitely. Assume that 1) Everything grows at 3% per year from year 2 onwards to infinity; and 2) The cash flow stream that goes from time 0 on indefinitely is similar in nature to a long term treasury bond.

- Interest rates are as follows: 3-month T-bill is 3%, the 2 year treasury is 4% and the long bond (30-year) is trading at 5% per year.

What would the investment need to be for this project to be breakeven (ignoring depreciation effects of the investment)?

Answer rating: 100% (QA)

Solution Cash flows will be as follows Particulars Year 1 in MM Year 2 Sales 100 110 Gross ... View the full answer