FIN 503

Fall 2020

Chapter 3

Assignment 3

Please answer all questions. Do not leave any question unanswered. Show your calculations. Submit the homework through LMS only. Typed answers are preferred but not required. Assignment is due on 11/10/2020 at 11:55 PM

Project X involves a new type of graphite composite in-line skate wheel. We think we can sell 6,000 units per year at a price of $1,000 each.

Variable costs will run about $400 per unit, and the product should have a four-year life.

Fixed costs for the project will run $450,000 per year. Further, we will need to invest a total of $1,250,000 in manufacturing equipment. This equipment is seven-year MACRS property for tax purposes. In four years, the equipment will be worth about half of what we paid for it. We will have to invest $1,150,000 in net working capital at the start. After that, net working capital requirements will be 25 percent of sales.

First prepare a pro forma income statement for each year.

Next calculate operating cash ow.

Finish the problem by determining total/project cash ow and then calculating NPV assuming a 28 percent required return.

Use a 34 percent tax rate throughout.