YOUR TASK:
1. FORECAST THE CASH FLOW
2. CALCULATE THE NPV
3. IS THIS A GOOD PROJECT?

The AZTEC Company has decided that it wants to introduce a new type of specialty pen to its office products line. They recognize it is a bit of a fad, so they anticipate this product having only a 4 year life. They have done research and learned the following:
• The building will need to be enhanced with improvements costing $12,000. Those improvements will be depreciated over the next four years after the initial investment at a rate of 1.3%, 2.6%; 2.6% 2.6%
• There will need to be equipment purchased at a cost of $8,000. The equipment will be depreciated at a rate of 20%, 32%, 19%, 12%
• Sales of the new product are expected to be 20,000 units per year during the 4 year period (years 1 – 4)
• The initial price of the product is expected to be $3.00 per unit.
• Inflation will increase the sales price by 2% every year.
• The variable cost of each unit is expected to be $2.10 and will increase at the same rate as the sales price.
• Fixed Costs for the project will be $8,000 per year, and they are expected to rise with inflation at a rate of 1% annually.

• The Market value of the building at the terminal year (the end of the project) is $7,500
• The Market value of the equipment at the terminal year is $2,000
• The company has a tax rate of 40%
• The company’s bonds currently trades in the market place at a yield of 10%.
• The company’s equity currently trades in the market place with a yield of 14%
• The company is financed using 50% bonds at 11% and 50% equities at 13%.
• The change in Net Working Capital is 10% of Sales (including year 0)

YOUR TASK: 1. FORECAST THE CASH FLOW 2. CALCULATE THE NPV 3. IS...