Year

Cummulative growth in NWC

Variable cash operating expense per sales

Depreciation in fixed capital

Year

$\backslash$table$[[],[$Fixed C$],[$NWC In$],[],[$Sales$]]$

Fixed Cash expenses

Variable Cash expenses

Depreciation

Operating income before taxes

Taxes on operating income

Operating income after taxes

Add back: Depreciation

After$-$tax operating cash flow

Salvage value

Taxes on salvage value

Return of NWC

Total after$-$tax cash flows

Cummulative after$-$tax cash flows

Discounted after$-$tax cash flows

Cummulative discounted after$-$tax cash flowsJackson Corporation is evaluating a project with the following characteristics:

$$ Fixed capital investment is $$2,000,000.$

$$ The project has an expected six$-$year life.

$$ The initial investment in net working capital is $$200,000.$ At the end of each year, net

working capital must be increased so that the cumulative investment in net working capital

is one$-$sixth of the next year$$s projected sales.

$$ The fixed capital is depreciated $30\%$ in Year $1,35\%$ in Year $2,20\%$ in Year $3,10\%$ in

Year $4,5\%$ in Year $5,$ and $0\%$ in Year $6.$

$$ Sales are $$1,500,000$ in Year $1.$ They grow at a $25\%$ annual rate for the next two years, and

then grow at a $10\%$ annual rate for the last three years.

$$ Fixed cash operating expenses are $$150,000$ for Years $1-3$ and $$130,000$ for Years $4-6.$

$$ Variable cash operating expenses are $40\%$ of sales in Year $1,39\%$ of sales in Year $2,$ and

$38\%$ in Years $3-6.$

$$ Jackson$$s marginal tax rate is $21\%.$

$$ Jackson will sell its fixed capital investments for $$150,000$ when the project terminates and

recapture its cumulative investment in net working capital. Income taxes will be paid on

any gains.

$$ The project$$s required rate of return is $10\%.$

$$ If taxable income on the project is negative in any year, the loss will offset gains elsewhere

in the corporation, resulting in a tax savings.

$($i$)$ Determine whether the project is a profitable investment using the NPV$,$ IRR, and profitability

index.

$($ii$)$ Compute the payback and discounted payback periods for the project.

$($iii$)$ If the tax rate increases to $30\%$ and the required rate of return increases to $13\%,$ is the project

still profitable?

Tax Rate $21\%$

Required rate of return for project $10\%$

Year $012345$

Projected sales growth

Cummulative growth in NWC

Variable cash operating expense per sales

Depreciation in fixed capital

Year $012345$

Fixed Capital Investment $$2,000,000\mathrm{.}00$

NWC Investments

Sales

Fixed Cash expenses

Variable Cash expenses

Depreciation

Operating income before taxes

Taxes on operating income

Operating income after taxes

Add back: Depreciation

After$-$tax operating cash flow

Salvage value

Taxes on salvage value

Return of NWC

Total after$-$tax cash flows

Cummulative after$-$tax cash flows

Discounted after$-$tax cash flows

Cummulative discounted after$-$tax cash flows

NPV

IRR

Profitability Index

Payback

Discounted Payback

DecisionYear

Depreciation in fixed capital

Total after$-$tax cash flows

Cummulative after$-$tax cash flows

Discounted after$-$tax cash flows

Cummulative discounted after$-$tax cash flows