Problem 4: The Kumar Corporation Capital Budgeting Example.

(Comprehensive Problem)

The Kumar Corpotation, a firm in the 34% marginal taxbracket 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 4: The Kumar Corporation Capital Budgeting Example.

(Comprehensive Problem)

cost of new plant and equipment: $9,900,000

Shipping and installation cost: $100,000

Unit sales:

Years Unit sold

1. 70,000

2. 100,000

3. 140,000

4. 70,000

5. 60,000

Sales price per unit: $280/ unit in years 1-4, $180/unit in year 5

Variable cost.per unit;

$140/unit

Annual fixed costs:

$ 300.000

Working Capital Requirement: There will be an initial working capital requirement of $100,000 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 I through 3. then decrease in year 4. Finally, all working capitals liquidated at the termination of the project at the end of year 5

The Depreciation 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 vears. Thus annual depreciation is $10.000,000 /year for 5 years.