Reference no: EM132553159

PROJECT AND RISK ANALYSIS As a financial analyst, you must evaluate a proposed project to produce printer cartridges. The equipment would cost $55,000, plus $10,000 for installation. Annual sales would be 4,000 units at a price of $50 per cartridge, and the project's life would be 3 years. Current assets would increase by $5,000 and payables by $3,000. At the end of 3 years, the equipment could be sold for $10,000. Depreciation would be based on the MACRS 3-year class, so the applicable rates would be 33%, 45%, 15%, and 7%. Variable costs would be 70% of sales revenues; fixed costs excluding depreciation would be $30,000 per year; the marginal tax rate is 40%; and the corporate WACC is 11%.

Question a. What is the required investment, that is, the Year 0 project cash flow?

Question b. What are the annual depreciation charges?

Question c. What are the project's annual cash flows?

Question d. If the project is of average risk, what is its NPV? Should it be accepted?

Question e. Management is uncertain about the exact unit sales. What would the project's NPV be if unit sales turned out to be 20% below forecast, but other inputs were as forecasted? Would this change the decision? Explain.