Reference no: EM133114261

If your company decides to go forward with this project, an assembly facility will be located in buildings leased for $1.15 million annually. This lease payment is tax-deductible, paid at the beginning of each year, and has an escalation clause causing the lease payment to increase 1.25% annually over the life of the project. Thus, the lease payment at the beginning of year 1 (at time zero) will be $1.15 million and it will then increase by 1.25% annually thereafter. Equipment for the facility will cost $83.5 million including delivery and installation. Net working capital needs will be $4.2 million immediately to support the facility. Assume at the end of the project's seven-year life the net working capital will not be needed and returned. 

Equipment depreciation will be according to MACRS 5-year asset class (20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76% respectively for years one through six). The equipment is expected to have a salvage value of $10.0 million after 7 years of use.

Your company expects to produce and sell each drone at an initial price of $110,000 per unit. The facility's annual maximum production capacity is expected to be 5,000 units during the 7-year economic life of the facility. The forecast is for actual production and sales to be 3,500 units annually. Fixed cash operating costs (not including depreciation and lease payment) are estimated to be $52.2 million annually and variable cash operating costs are estimated at $85,000 per unit. Your company's federal-plus-state effective tax rate is 40%. Assume that the company is able to take advantage of all tax shields (tax-deductions).

Your task is to analyze this project. You must recommend acceptance or rejection and evaluate the project's acceptability using the net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR) criteria. Your company's weighted average cost of capital (WACC) and thus the project's required rate of return is 15%.

QUESTION 

1. What is the year 0 net investment outlay on this project?

2. What is the expected nonoperating terminal cash flow on this project in year 7?