You are Head of the capital budgeting team of your company. Your company is evaluating a new project -- to produce plastic food containers that resist stains and odours. The plastic material was discovered last year after the company spent $3 million on research and development. If the new product is launched, the company will have to purchase land, estimated for $750,000, and build a new plant and equipment, estimated for $1.5 million. Sales of the new product are forecasted at $2million for year 1 and costs at $1 million. Both sales and costs are expected to increase by 5% per year. Throughout the project, working capital including inventories and raw materials is forecasted at20% of sales of the following year (e.g., NWC0 = 20% * Sales1 and so on).The project will last five years. After that, the company expects to sell the licensing fee for $2 million, the land for $1,000,000 and the plant and equipment for $500,000. Note that land is not depreciable. The depreciation for the plant and equipment falls under 5-year MACRS with the following rates:Year 1 2 3 4 5 6Rate 20% 32% 19.2% 11.52% 11.52% 5.76%If the cost of capital is 15% and the tax rate is 35%, should the company accept the project? What isNPV of the project? Use the table next page to show your work.a. How many years of cash flow do you need to estimate for this project?Number of years to estimate cash flow = yearsb. What is the initial investment?Initial investment = $c. What are the changes in net working capital for year 0 and at the end of the project?∆NWC at year 0 = $ ∆NWC at the end = $d. What are the operating cash flow for year 1 and for year 3?OCF at year 1 = $ OCF at year 3 = $e. What is the terminal cash flow?Terminal cash flow = $f. What is NPV of the project?NPV = $g. Should the project be accepted?Circle one: YES NO
You are Head of the capital budgeting team of your company. Your company is evaluating a new project -- to produce plastic food containers that resist stains and odours. The plastic material was discovered last year after the company spent $3 million on research and development. If the new product is launched, the company will have to purchase land, estimated for $750,000, and build a new plant and equipment, estimated for $1.5 million. Sales of the new product are
million for year 1 and costs at $1 million. Both sales and costs are expected to increase by 5% per year. Throughout the project, working capital including inventories and raw materials is forecasted at
20% of sales of the following year (e.g., NWC0 = 20% * Sales1 and so on).
The project will last five years. After that, the company expects to sell the licensing fee for $2 million, the land for $1,000,000 and the plant and equipment for $500,000. Note that land is not depreciable. The
Year 1 2 3 4 5 6
Rate 20% 32% 19.2% 11.52% 11.52% 5.76%
If the cost of capital is 15% and the tax rate is 35%, should the company accept the project? What is
a. How many years of cash flow do you need to estimate for this project?
Number of years to estimate cash flow = years
b. What is the initial investment?
Initial investment = $
c. What are the changes in net working capital for year 0 and at the end of the project?
∆NWC at year 0 = $ ∆NWC at the end = $
d. What are the operating cash flow for year 1 and for year 3?
OCF at year 1 = $ OCF at year 3 = $
e. What is the terminal cash flow?
Terminal cash flow = $
f. What is NPV of the project?
NPV = $
g. Should the project be accepted?
Circle one: YES NO
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