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Price per unit Variable cost per unit Overhead cost per unit PPE cost (equipment +shipping) NWC Tax Rate Salvage Value Unit Sales Total Sales Operating costs Overhead costs Depreciation EBT Taxes Operating Income Depreciation WC Work line WC Work changes Operating Cash Flows Cost PPE Salvage Value Tax on gain/loss Timeline Cash Flows Payback Period NPV IRR. Profitability Index Correct answers NPV IRR Payback PI 20.00% 32.00% 19.20% 11.52% 1.38 0.83 0.01 240,000 8.00% 29.00% 65,000 138,000 96,000 125,000 142,000 126,000 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 190,440 172,500 195,960 173,880 S 132,480 114,264 103,500 117,576 104,328 79,488 1,904 1,725 1,960 1,739 1,325 27,648 27,648 76,800 48,000 46,080 26,272 (9,525) 30,344 40,165 24,019 7,619 8,800 11,648 6,966 17,054 18,653 (9,525) 21,545 28,517 27,648 27,648 76,800 48,000 46,080 15,235 13,800 15,677 13,910 10,598 (10,598) (15,235) 435) 1,877 (1,766) (3,312) 15,235 65,218 69,152 65,858 52,853 34,103 (240,000) 65,000 18,850 (255,235) 65,218 69,152 65,858 52,853 34,103 0.89 (S26,862.61) 4.48 10.52% 29,778 13.75% 3.75 years 11.67%

****** This question has been completed, but I don't understand how to get the right answers. If you could explain what I did wrong and how to get the right answer that'd be great!

Capital Budgeting Problem. ABC Corporation is evaluating a new product. As assistant to the director of capital budgeting, and you must evaluate the project. The project would be produced in an unused building adjacent to ABC’s Sandusky plant; ABC owns this building which has an historical cost of $325,000 as well as accumulated depreciation of $325,000. Additionally, you learn that ABC renovated the building last year at a price of $125,000, expensing the cost. Required equipment for the project would cost $225,000, plus an additional $15,000 shipping and installation. Net working capital will amount to 8% of sales in the following year. The machinery is considered 5-year property for tax purposes--be sure to use MACRS.

   The project is expected to operate for 5 years, at which time it will be terminated. The cash inflows are assumed to begin one year after the project is undertaken, or at t=1 and to continue out to t=5. At the end of the project’s life (t=5) the equipment is expected to have a salvage value of $65,000. Unit sales are expected to total 138,000 units in the first year, 125,000 in the 2nd, 142,000 in the third and 126,000 and 96,000 in the final years. The expected sales price is $1.38 per unit. Cash operating costs for the project (i.e., excluding depreciation) are expected to total 60 percent of dollar sales. Overhead expenses to be allocated to the project are 1% of sales. ABC’s marginal tax rate is 29% and its required rate of return is 9.5%. Tentatively, the project is expected to be of equal risk to the corporation’s other projects. You have been asked to prepare a spreadsheet analysis and to calculate NPV, IRR, profitability index, and payback period. Assume your presentation is to a mixed group, i.e., some do not have business degrees. Briefly explain what NPV, IRR, PI and payback measure. Finally, provide a recommendation on the project.

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