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.

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= 50000 3=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

C_t =27025000

If C₀ C_t the project is profitable. If C₀ C_t the project is not profitable.

Since our C₀ is less than C_t  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

C_t=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 (1^st year) +13125000 (2^nd year) +6400000 (3^rd year)= 27025000

Initial cost= 4000000+100000

=4100000