1. What are the main differences between Cash Flows and Accounting Income?

2. Consider the following facts around a New Project financing:

Equipment

Cost of New Equipment 750,000 Life 10 Salvage Value in Year 10

Reconditioned 300,000 As-is 50,000

Depreciation

Sales

Straight-Line

Year 1 Sales (units) 5,000 Growth Rate

Years 1-5 15%

Years 6-10 - Price, $/unit 22 Annual rate of change 5%

Expenses

Year 1 Variable Costs, $/unit 5 Year 1 Fixed Costs, $ 50,000 Annual rate of change 2.5%

Working Capital

Net Working Requirement, % of sales 5.0%

Assume drops to zero in year 10

Tax Rate 23.5%

Questions

1) Please build a 10-year cash flow model using the above facts, and calculate the IRR & NPV assuming the equipment is sold at its as-is valuein year 10 (assume 7.5% as discount rate for NPV)

Assume zero taxes if there is a loss

2) What is the IRR if equipment is reconditioned at a cost of $150,000?

3) What is the breakeven sales price in year 1, to generate an IRR of 12%, assuming as-is salvage value?