What are project free cash flows per year

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Allman Corp is considering acquiring a new segment to add to its product line. The estimated sales growth rate is 6.75% and the Allman Corp forecasts to sell 3000 units of its new product, which is priced at 37.50 per unit. COGS is estimated at 48% of current years sales. The expansion will need an investment of $90,000 in new equipment, which will be depreciated at $25,000/year over three years. Net working capital is estimated to be 20% of sales per year. The firm also builds up initial inventory of 10% of the first year's anticipated COGS before beginning the project. The firm's tax rate 35% and the firm's WACC is 10.5%. The equipment will be sold at the end of three years for $10,000.

1. What are project free cash flows per year?

2. Calculate the terminal value of the equipment at the end of three years

3. What is the NPV and IRR for this project? Should you accept it?

Reference no: EM131114317

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