Capital Budgeting Problem?

You are the assistant to the CFO of Wonder Werks and were asked for a recommendation for the following:
The new Werks Weed product is expected to generate the following revenues: Year 1 $175,000; Year 2 $202,820; Year 3 $201,750; Year 4 $352,000; Year 5 $620,500. Operating expenses are 38% of revenues.
The project requires an initial investment of $500,000 for equipment and will be placed in a portion of an existing factory. It will cost $76,400 to refurbish the factory floor and take out an existing product line that would generate pre-tax income of $19,250 for the next three years. The equipment has a 10-year life for book purposes and 5-year life for tax purposes. The equipment has an estimated salvage value of $50,000. It can be sold for its book value at the end of year six. It is depreciated on a straight-line basis for both book and tax purposes.
The corporate tax rate is 30%. All tax liabilities are paid the year after they are incurred.
The project requires an initial investment in working capital of $50,000. The changes in working capital are: year 1 up $22,666; year 2 down $10,120; year 3 down $42,875; year 4 up $23,450; and year 5 down $49, 725.
The company’s opportunity cost of capital is 12.5%.
Round all answers to the nearest $1.
Show all work.
1) What is the NPV of the project?
2) Will you recommend the project and why?
3) What are the undiscounted cash flows in year 6?
4) What are the discounted cash flows in year 7?
5) What is the minimum amount that year 2 revenues must change in order for you to change your recommendation on the project?

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One Response to “Capital Budgeting Problem?”

  1. Camille says:

    Sounds like either a really hard project or a really hard homework assignment lol

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