Project Evaluation & Capital Investment

Volume:                                              52,000 units --- 57,000 units --- 61,000 units

Price:                                                   $4.50 per unit --- $4.25 per unit --- $3.85 per unit

Marginal Cost:                                    $3.25 per unit --- $2.50 per unit --- $2.20 per unit

Expected Life of Project:                               3 years

Fixed Costs:                                                    $14,000 per year

Capital requirement:                                      $100,000   (90% depreciated over the 3-year span)

Market value of equipment in 3 years:          $10,000

Charge to Net Working Capital:                    $30,000 (at t = 0, then recapture at t = 3)

Tax rate:                                                         34%

Risk free rate (3-year):                                   2.5%

Total Market Return:                                      9.95%

Project Beta:                                                   2.30

Project Debt/Equity Structure:                       0.70

Cost of Debt (pretax):                                     5.5%

Find the following:

1. Project Cash Flow (Use Cash Flow From Assets [CFFA]) in Year 1

2. Project Cash Flow (Use Cash Flow From Assets [CFFA]) in Year 2

3. Project Cash Flow (Use Cash Flow From Assets [CFFA]) in Year 3

4. Cost of Equity Capital