Problem 3: The Easterwood Corporation Capital Budgeting Example. The Easterwood Corporation, a firm in the 34% marginal tax bracket with a 15% required rate of return or cost of capital, is considering a new project. This project involves the introduction of a new product. The project is expected to last five years and then, because this is somewhat of a fad project, to be terminated. Given the following information, determine the free cash flows associated with the project, the project's NPV, the profitability index, and the internal rate of return.Apply the appropriate decision criteria. Problem 3: The Easterwood Corporation Capital Budgeting Example. Cost of new plant and equipment: Shipping and installation cost: Unit Sales: Year . 1 . Unit sold 2 3 4 5 Sales price per unit: Variable cost per unit: Annual fixed costs: $300,000 $ 20,900,000 100,000 130,000 160,000 100,000 60,000 $500/unit in years 1-4, $380/unit in year 5 $260/unit $ 300,000 10-5 Working Capital Requirement: There will be an initial working capital requirement of $ 500,000 just to get production started. Then, for each year, the total investment in NWC will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. The Depretiation Method: We used the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 years. Thus annual depreciation is $21,2000,000/year for 5 years. 10-6

Problem 3:The Easterwood Corporation Capital Budgeting Example. - The Easterwood Corporation, a firm in the 34% marginal tax bracket with a 15% required rate of return or cost of capital, is considering a new project. This project involves the introduction of a new product. The project is expected to last five years and then, because this is somewhat of a fad project, to be terminated. Given the following information, determine the free cash flows associated with the project, the project's NPV, the profitability index, and the internal rate of return.Apply the appropriate decision criteria. Problem 3:The Easterwood Corporation Capital Budgeting Example. - Cost of new plant and equipment: $20,900,000 - Shioving and installation cost: \$300.000 - Sales price per uniti $500/ unit in years 14,$380/ unit in year 5 - Variable cost per unit: $260/ unit - Annual fixed costsi $300,000 - Working Capital Requirement: There will be an initial working capital requirement of 500,000 just to get production started Then, for each year, the total investment in NWC will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 thro capital is liquidated at the termination of the project at the end of year 5 . - The Depretiation Method: We used the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 years. Thus annual depreciation is $21,2000,000 / year for 5 years. Problem 3:The Easterwood Corporation Capital Budgeting Example. - The Easterwood Corporation, a firm in the 34% marginal tax bracket with a 15% required rate of return or cost of capital, is considering a new project. This project involves the introduction of a new product. The project is expected to last five years and then, because this is somewhat of a fad project, to be terminated. Given the following information, determine the free cash flows associated with the project, the project's NPV, the profitability index, and the internal rate of return.Apply the appropriate decision criteria. Problem 3:The Easterwood Corporation Capital Budgeting Example. - Cost of new plant and equipment: $20,900,000 - Shioving and installation cost: \$300.000 - Sales price per uniti $500/ unit in years 14,$380/ unit in year 5 - Variable cost per unit: $260/ unit - Annual fixed costsi $300,000 - Working Capital Requirement: There will be an initial working capital requirement of 500,000 just to get production started Then, for each year, the total investment in NWC will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 thro capital is liquidated at the termination of the project at the end of year 5 . - The Depretiation Method: We used the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 years. Thus annual depreciation is $21,2000,000 / year for 5 years