A firm is planning a new project:

(1) This project costs $1,550,000 to purchase fixed assets, and $50,000 for shipping & installation fee.

(2) The life of this project is 6 years. The salvage value of fixed assets is 15% of the gross fixed assets (including shipping & installation fee).

(3) The working capital needed is $35,000 in 2023, and it is expected to increase 3.5% each year thereafter.

(4) This project can produce 200,000 units in 2023, and the production is expected to grow 8% each year. The current unit price is $7.5, and the cost of each unit is $5.

(5) The inflation rate is 5.8% each year. The firm will adjust both the unit price and the variable cost of each unit based on the inflation rate.

(6) The firm uses the 5-year MACRS depreciation policy for its fixed assets, and it is in the 21% tax bracket.

(7) The cost of capital for the firm is 12%.

 

Scenario	Production	Unit Price	Unit Cost
Best Case	250,000	$8.0	$4.5
Expected Case	200,000	$7.5	$5
Worst Case	150,000	$7.0	$5.5

 

A) Calculate the initial outlay, annual after-tax cash flows, and terminal cash flow for this project.

B) Calculate the payback period, discounted payback period, NPV, PI, IRR, and MIRR.

C) Perform sensitivity analysis of the effects of cost of capital on the project NPV.

D)  Scenario analysis of the combined effects of the following three variables on NPV, IRR, and MIRR.

Answer rating: 100% (QA)

A Initial Outlay Calculation The initial outlay for the project includes the cost of fixed assets shipping and installation fee and working capital Cost of fixed assets 1550000 Shipping and installati... View the full answer