IBM is considering a new expansion project and the finance staff has received information summarized below.

• The project requires IBM to purchase $500,000 of equipment in 2013 (t=0).
• Account Receivables will increase by $200,000 and accounts payable will rise by $50,000.
• The project will last for four years. The company forecasts that they will sell 2,685,000 units in 2014, 2,600,000 units in 2015, 2,525,000 units in 2016, and 2,450,000 units in 2017. Each unit will sell for $2.5.
• The fixed cost of producing the product is $1 million each year.
• The variable cost of producing each unit will rise from $1.01, 1.02, 1.03 and $1.04 from 2013 to 2017 respectively.
• The equipment will be depreciated under the MACRS system using the applicable rates of 33%, 45%, 15%, and 7% respectively
• When the project is completed in 2017 (t=4), the company expects that it will be able to salvage the equipment for $100,000, and it expects that it will fully recover the NWC.
• The estimated tax rate is 35%.
• Based on the perceived risk, the project's WACC is estimated to be 12%.

Your main task is to and evaluate the cash flows, analyze the results, and present your recommendations. To help in the analysis, answer all the following questions:

1. What is the equipment cost?

2.What is the Net Working Capital?

Hint: Net Working Capital = Increase in Current Assets - Increase in Current Liabilities

3. What is the total investment amount at the start of the project ?

Hint: Initial investment in Year 0 is the total equipment cost + Net Working Capital

4.What is the depreciation amount for each year?

• a table with 5 columns

List accounts in this column.	Year 1	2	3	4

5. what the book values for each year?

• Create a table on Canvas with 5 columns

List accounts in this column.	Year 1	2	3	4

6. Calculate the after-tax salvage value

7. Compute the Net Income during the project's life for each year.

• Use table on Canvas with 5 columns

Note:

You must list all the accounts and entries in order to earn full credit. No credit will be awarded for merely listing numbers without the associated accounts. Show the work in order to full credit

List accounts in this column.	Year 1	2	3	4

8. Calculate the Operating Cash Flows (OCF) for each year.

• Use table on Canvas with 5 columns

List accounts in this column.	Year 1	2	3	4

9. Create the projected Free Cash Flow Schedule for the project:

• mak a table on Canvas with 5 columns

Projected Free Cash Flow Schedule

Year 0 Year 1 Year 2 Year 3 Year 4

OCF OCF OCF OCF

- Equipment cost + After-tax Salvage Value

- NWC + Total NWC

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Total Free Cash Flows

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10. Calculate the Net Present Value (NPV) using cash flow keys. List the steps.

11. Should the project be accepted or rejected based on the NPV? Explain

12.Calculate the IRR using cash flow keys. List the steps.

11. Should the project be accepted or rejected based on the IRR? Explain

12. present the project to the owners using the Free Cash Flow figures.