Tamworth Limited is considering embarking on a new project. The company has a 30% tax rate and 15% required rate of return. The project involves the introduction of a new product. The project is expected to last five years and then, because this is somewhat of a fad product, it will be terminated.
Cost of new plant and equipment : $9,900,000
Shipping and installation costs : $100,000
Sales price per unit : $280/unit in years 1-4; $180/unit in year 5.
Variable cost per unit : $140 per unit
Annual fixed costs : $300,000
Predicted sales for the next five years:
|Units sold (number)||70,000||100,000||140,000||70,000||60,000|
Working capital: There will be an initial working capital requirement of $100,000 to get production started. For each year, the total investment in net working capital will equal 10% of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 to 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5.
Depreciation: The straight-line depreciation method will be used over five years. Is assumed that the plant and equipment will have no salvage value after five years.
Given the above information, showing your workings, using Excel, determine the project’s:
- Initial investment
- Relevant cash flows
- Terminal cash flow
- Free cash flows
- Net present value
- Internal rate of return
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