Capital Budgeting Concepts # 2

Type: Individual Project
Unit:  Capital Budgeting Concepts
Due Date:  Wed, 6/21/17
Grading Type: Numeric
Points Possible:  200
Points Earned:  0
Deliverable Length:  A spreadsheet file and a 700–1,000-word report that addresses the qualitative questions
A company is considering making a new bicycle. The company expects to sell 4,000 units of the bicycle each year for 5 years. Each bicycle is expected to sell for $400. The company’s tax rate is 30%. Fixed costs are $700,000 per year, and variable costs are $75 per bicycle.
To make the bicycle, the company will purchase a machine that costs $1.5 million today. The machine will be depreciated with straight-line depreciation over a 5-year period. The machine will be sold for $50,000 when this project ends in 5 years.
The net working capital requirements are $150,000 at Year 0, which are expected to be recovered in full in Year 5. The required rate of return for the project is 12%.
Complete the following with this information:

Estimate the project’s cash flows
Estimate the project’s net present value (NPV)
Determine if the project should be accepted or not

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