Your firm has the opportunity to enter into a new market. The new opportunity is expected to generate revenues of $2.5 million the first year with sales expected to grow by 7% per year for four years. The entire project lasts five years and requires an initial investment in fixed assets of $2.75 million. The project also requires an initial investment of $85,000 in net working capital which will be recovered at the end of the project. Based on your research, variable costs account for 68% of revenues and fixed costs are $105,000 each year. The fixed asset classifies as a 7-year asset and will be depreciated using MACRS. Your marginal tax rate is 35%, your required rate of return is 18%, and you need to get paid back your start-up costs within 4 years. You believe you can salvage the asset for $500,000 at the end of the project and you donâ€™t plan to use debt financing.
Year Depreciation Rate
c. What is the cash flow from assets for each year?
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d. What is the net present value?
e. What is the IRR?
f. What is the payback period?
g. Based on the answers to d-f above should you accept this project?