Corporate Finance / Need a paper redone that was wrong

corpfinweek3.docx

Home >Business & Finance homework help >Management homework help >Corporate Finance / Need a paper redone that was wrong

Cost of the new project	$4000000
Installation cost	$100000
Estimated unit sales in year 1	$50000
Estimated unit sales in year 2	$75000
Estimated unit sales in year 3	$40000
Estimated sale price per unit in year 1	$150
Estimated sale price per unit in year2	$175
Estimated sale price per unit in year 3	$160
Variable cost per unit	$50000
Annual fixed cost	$120
Additional working capital needed	435000
Depreciation method	3 years straight line method
Texas ROK’s tax rate	40%
Texas ROK’s cost of capital	13%

See notes to correctly calculate cash flows. Once cash flows are correct, you should be able to arrive at the correct answers for the rest of the assignment. Let me know if you need help with this.

Questions

1. Calculate the operating cash flow and the change in working capital. It is best to separate the cash flows by each year, starting year zero. For year 0, the cash flow is the cost of the project. For years 1-3, they should be: revenue- variable costs-fixed costs-depreciation. This is your earnings before taxes. Using this figure calculate the taxes. Subtract taxes and add back depreciation. This is your cash flow for each year. Now you have what is needed to complete the rest of the assignment.

Operating cash flow= operating income (revenue-cost) + depreciation –taxes +/-working capital Revenue= (50000 = 7500000+13125000+6400000= 27025000

Cost= initial cost is 4000000 + installation cost 100000=4100000 add the cost for units per year= year 1= 120 year 2= 120= 9000000 year 3= 120=4800000. Plus variable cost for the three years= 500003=150000. Total cost= 24,050,000

Depreciation= (24050000-0)/3= 8016667

Tax = 40% of the cost=40%*4000000= 1600000

Cost of capital= 13% of the cost= 13%4000000=520000

Working capital= 4000000-520000+435000=3915000

Operating cash flow=27025000+8016667-1600000+3915000= 13306667

2. Determine the NPV and IRR of the project

C0=4100000

Ct =27025000

If C0Ct the project is profitable. If C0Ct the project is not profitable.

Since our C0 is less than Ct The project is profitable.

To calculate IRR we equate the NPV to zero then solve for the rate. High rate = Profit, Low Rate = not profitable

-C0=NPV

NPV=0

C0=4100000

Ct=27025000

T=3

-4100000=0

27025000= 4100000(1+r)3

= (1+r)3

6.561463415=(1+r)3

cube root on both sides to get

1.875=1+r

1.875-1=r

0.875=r

The rate is 87.5% Profitable

3. Should the company accept or reject the project based on NPV? Why?

They should accept the project since it is profitable.

4. Should the company accept or reject the project based on IRR? Why?

They should accept the project since the rate is high. This means that it would be profitable to the company.

5. What is your final accept or reject decision?

They should take on the project since both the NPV and IRR returns are positive. It is

6. What is the payback period for this project? Would this influence your decision to accept or reject.

Payback is how long it takes for a company to recover the initial cost of any given project. It would not change my decision to accept this project as it seems reasonable

Revenue= (50000 = 7500000 (1st year) +13125000 (2nd year) +6400000 (3rd year)= 27025000

Initial cost= 4000000+100000

=4100000

The payback is 1 year.