You have been hired as a consultant for Peter´s Inc., manufacturer of computers. The company projects unit sales for a new quantic computer as follows:

Year Unit Sales

1 100,000

2 120,000

3 130,000

4 140,000

• Production of the computers will require $1,800,000 in net working capital immediately, all of which will be recovered at the end of the project.
• Total fixed costs are $3,800,000 per year, variable production costs are $350 per unit, and the units are priced at $1000 each.
• The equipment needed to begin production has an installed cost of $9,500,000. The company will depreciate the equipment with a straight line depreciation in a period of 5 years.
• In four years, this equipment can be sold for about 20 percent of its acquisition cost.
• The tax rate is 21 percent.
• The company imposes a payback cutoff of two years for its investment projects.
• The expected profitability for a business with same risk is 15%, The Treasury bills rate is 3% and the Beta for the industry is 1.2.
• The company Debt is 15,000,000$, with a cost of 3%, and the Total shareholder´s Equity is 30,000,000$

QUESTIONS:

1. Complete the pro forma and determine total cash flows for each year of project’s life.
2. Calculate the following investment criteria for the project:

(a) Payback period

(b) Profitability Index (PI)

(c) Internal rate of return (IRR)

(d) Net Present Value (NPV)

1. Explain your decision whether you recommend accepting or rejecting the project.

Year	0	1	2	3	4
Sales revenues
Variable Costs
Fixed Costs
Depreciation
EBIT
Taxes
Net income
Operating Cash Flow
Capital spending
Net Working Capital
After-tax salvage value
Total Cash Flow

Answer rating: 100% (QA)

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