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# Capital Budgeting

I have a company that has a 8 year project life. The project requires an initial investment of \$300 million to construct building and purchase equipment, and \$20 million for shipping & installation fee. The fixed assets fall in the 7-year MACRS class. Salvage value of the fixed assets is \$15 million. The number of units of the new product expected to be sold in the first year is 2,000,000 and the expected annual growth rate is 10%. Sales price= \$300 per unit; variable cost= \$220 per unit in the first year adjusted based on the estimated annualized inflation rate of 2.8%. Required net operating working capital (NOWC) is 12% of sales. Corporate tax rate = 40.48 %. The discount rate is a WACC of 7.67%
a) Compute the depreciation basis & annual depreciation of the new project using MACRS allowances
b) Estimate annual cash flows for the 8 years.
c) Draw a time line of cash flows.

d) Using WACC of 7.67 as the discount rate, compute (NPV, IRR, MIRR, PI, Payback, Discounted Payback) to analyze the new project.

c) Please perform a sensitivity analysis(in excel) for the effects of sales growth rate, cost of capital, unit costs, sales price on the estimated NPV or IRR in order to demonstrate the sensitivity of the model. Please perform a scenario on these variables.
Please determine whether this project should be accepted based on the WACC and NPV.

#### Solution Summary

The solution does a great job of answering the question. The solution is detailed and very easy to follow along. All the steps are clearly shown and Excel formulas are provided so that the student can answer similar questions in the future. It can be easily understood by anyone with a basic understanding of the topic. Overall, an excellent solution.

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