QUESTION $6$

QUESTIONS NUMBERS $6-8$ HAVE COMMON INFORMATION ON NEW PROJECT

Lowell Inc. projects unit sales for a new project with a life of FOUR YEARS as follows:

Year

Unit Sales

$1$

$10,000$

$2$

$12,000$

$3$

$14,000$

$4$

$16,000$

Production will require Lowell must have an amount of NOWC on hand equal to $9$ percent of the upcoming year$$s sales. Total fixed costs are $$100,000$ per year, variable production costs are $$230$ per unit, and the units are priced at $$300$ each. The sale price and variable costs will increase by $2$ percent every year. The equipment needed to begin production has an installed cost of $$2,000,000.$ The equipment qualifies as $5-$year MACRS property.

Years

$1$

$2$

$3$

$4$

Depreciation rate

$20\%$

$32\%$

$19\%$

$12\%$

In FOUR years, this equipment can be sold for about $21$ percent of its acquisition cost. Lowell is in the $25$ percent marginal tax bracket and has a required return on all its projects of $18$ percent. Based on these preliminary project estimates, what is the Free Cash Flow for the Year $0$ of the project?

Free cash flow $=$ Total Initial Investment $+$ Total annual project CF $+$ Total Salvage Value

$-2,270,000$

$-2,330,000$

$-2,390,000$

$-2,210,000$

$3\mathrm{.}5$ points

QUESTION $7$

QUESTIONS NUMBERS $6-8$ HAVE COMMON INFORMATION ON NEW PROJECT

Lowell Inc. projects unit sales for a new project with a life of FOUR YEARS as follows:

Year

Unit Sales

$1$

$10,000$

$2$

$12,000$

$3$

$14,000$

$4$

$16,000$

Production will require Lowell must have an amount of NOWC on hand equal to $9$ percent of the upcoming year$$s sales. Total fixed costs are $$100,000$ per year, variable production costs are $$230$ per unit, and the units are priced at $$300$ each. The sale price and variable costs will increase by $2$ percent every year. The equipment needed to begin production has an installed cost of $$2,000,000.$ The equipment qualifies as $5-$year MACRS property.

Years

$1$

$2$

$3$

$4$

Depreciation rate

$20\%$

$32\%$

$19\%$

$12\%$

In FOUR years, this equipment can be sold for about $21$ percent of its acquisition cost. Lowell is in the $25$ percent marginal tax bracket and has a required return on all its projects of $18$ percent. Based on these preliminary project estimates, what is the NET SALVAGE VALUE of the project?

$430,000$

$400,000$

$460,000$

$370,000$

$3\mathrm{.}5$ points

QUESTION $8$

QUESTIONS NUMBERS $6-8$ HAVE COMMON INFORMATION ON NEW PROJECT

Lowell Inc. projects unit sales for a new project with a life of FOUR YEARS as follows:

Year

Unit Sales

$1$

$10,000$

$2$

$12,000$

$3$

$14,000$

$4$

$16,000$

Production will require Lowell must have an amount of NOWC on hand equal to $9$ percent of the upcoming year$$s sales. Total fixed costs are $$100,000$ per year, variable production costs are $$230$ per unit, and the units are priced at $$300$ each. The sale price and variable costs will increase by $2$ percent every year. The equipment needed to begin production has an installed cost of $$2,000,000.$ The equipment qualifies as $5-$year MACRS property.

Years

$1$

$2$

$3$

$4$

Depreciation rate

$20\%$

$32\%$

$19\%$

$12\%$

In FOUR years, this equipment can be sold for about $21$ percent of its acquisition cost. Lowell is in the $25$ percent marginal tax bracket and has a required return on all its projects of $18$ percent. Based on these preliminary project estimates, what is the IRR of the project?

$12\mathrm{.}05\%$

$22\mathrm{.}55\%$

$11\mathrm{.}40\%$

$17\mathrm{.}17\%$