Q1) a. If project is undertaken, at t = 0 company will need to increase its inventories by $50,000, and its accounts payable will increase by $10,000. This net operating working capital will be recovered at end of project's life (t = 4).
b. If project is undertaken, company will realize extra $600,000 in sales over each of next four years (t = 1, 2, 3, and 4). Company's operating costs (not including depreciation) will equal $400,000 a year.
c. Company's tax rate is 40%.
d. At t = 4, project's economic life is complete, but it will have salvage value (before-tax) of $50,000.
e. Project's WACC is 10%.
f. Company is very profitable, so any accounting losses on this project can be utilize to decrease company's overall tax burden.
i) Compute project's net present value (NPV)? What does it mean?
ii) Determine the IRR of the project? What does it imply?
iii) If sales figure has plus or minus 5% movement and operating cost has about 6% plus or minus changes, what must be investment decision in best case scenario?
iv) If sales figure has plus or minus 5% movement, and operating cost has about 6% plus or minus changes, what must be investment decision in worst case scenario?
v) If alternative of project offers and overseas investment opportunity for four years with 12% return and presently has exchange rate as 1$USD = .95FOREIGN DOLLAR and dollar depreciates at rate of 5% every year, must CARLOS company select alternative investment?