FIN3030 Week-3 Assignment-3

  

First identify or calculate the capital spending, the operating cash flow, the change in net working capital, and finally the free cash flow to the firm of the project. Free Cash Flows are cash flows available to the firm after stakeholders have been paid (interest and dividends). It is these free cash flows that you find that are discounted at the weighted average cost of capital to calculate the net present value and the internal rate of return.

You will assess whether to make the investment or not. Use your accept-reject rules for the net present value and the internal rate of return. 

Redbird, Inc. is considering an addition to its current operations. The figures are below.

  

Cost   of the new project

$3,000,000   

 

Installation   costs

$100,000   

 

Estimated   unit sales in year 1

40,000   

 

Estimated   unit sales in year 2

65,000   

 

Estimated   unit sales in year 3

35,000   

 

Estimated   sales price in year 1

$200 

 

Estimated   sales price in year 2

$200 

 

Estimated   sales price in year 3

$150 

 

Variable   cost per unit

$130 

 

Annual   fixed cost

$40,000   

 

Initial   working capital needed

$60,000   

 

Additional   Working capital needed

5 % of   sales 

 

Depreciation   method

5   years straight-line method, no salvage value 

 

Redbird’s   tax rate

40% 

 

Redbird’s   cost of capital

15% 

 

1. Calculate Operating      Cash Flow, change in Net Working Capital, and calculate Free Cash Flow.      Show your calculations in a Word document or an Excel spreadsheet. 
2. Determine the      NPV and IRR of the project. Show your calculations in a Word document or      an Excel spreadsheet. 
3. Assess the      project. Be sure to state the basis upon which you made your option      choices. You should prepare a one-page executive summary of your findings,      with 3–5 pages of supporting analysis. 
4. You must      submit your backup in Excel or other supporting documentation showing how      answers were reached.