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4. SNS Air is considering a new project. The project will require $85,000 for new fixed assets There is a total of $5,000 combined increase in inventories and account receivables which is partly financed by 1,500 increase in account payables. The project has a 5-year life. The fixed assets will be depreciated using 5-year MACRS to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 10 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of 1,500 units and the selling price per unit is $35 while the variable cost per unit is expected to be $20. Annual fixed costs are expected to be $2,500. The tax rate is 35 percent and the required rate of return (cost of capital) is 8.5 percent. Calculate the project's initial investment costs, annual operating cash flows and terminal cash flows. What are project's NPV and IRR? 5 85,000 6 After-tax benefit (Sales-Costs)(1 13000 1 13000 1 3570 3272.5 8 Dep Tax 9 OCF 95205652.5 22520 18652.5 16570 16272.5 7310 11 After tax salvage 12 +DNWC 8500-(8500-5100)*.35 14 Overall CF from Project -88,500 18950 22520 18652.5 16570 27082.5 16 NPV 17 IRR (S7,334.06) 5.37% 19 Depreciation % 0 2 6 21 BV 22 Dep 23 Tax rate 24 Dep Tax 85,00068,000 40,800 24,650 14,450 5,100 17,000 27,200 16,150 10,200 9,3505,100 0.35 1785 595095205652.53570 3272.5 5 29 IO 30 FA 85,000 3,500 32 OCF 33 Sales Revenue 34 -Cost 35 EBDIT 52500 52500 5250052500 52500 32500 32500 32500-32500 32500 20000 20000 20000 20000 20000 17000 -27200-161 50 -10200 37 EBIT 9800 10650 3430 -3727.5 6370 6922.5 2520-1347.5 1950 6802502.5 16150 22520 18652.5 39 NI 17000 18950 27200 10200 16570 16272.5 41 OCFyr 42 TCF 43 After tax salvage 44 +DNWC 8500-(8500-5100)*.35 7310 46 Overall CF from Project ,500 18950 22520 18652.5 16570 27082.5 49 Depreciation % 2 6 51 BV 52 Dep 85,00068,00040,800 24,650 14,4505,100 7,00027,200 16,150 10,2009,350 5,100

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