Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by bodybuilders. The project requires use of an existing warehouse, which the firm acquired three years ago for $3 million andwhich it currently rents out for $114,000. Rental rates are not expected to change going forward. In addition to usingthe warehouse, the project requires an upfront investment into machines and other equipment of $1.5 million. Thisinvestment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expectsto terminate the project at the end of eight years and to sell the machines and equipment for $503,000. Finally, theproject requires an initial investment into net working capital equal to 10% of predicted first-year sales. Subsequently,net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be$4.7 million in the first year and to stay constant for eight years. Total manufacturing costs and operatingexpenses (excluding depreciation) are 80% of sales, and profits are taxed at 30%.a. What are the free cash flows of the project?b. If the cost of capital is 15%, what is the NPV of the project?a. What are the free cash flows of the project?The FCF for year 0 is $ - 1.970 million. (Round to three decimal places.)The FCF for years 1-7 is $0.623 million. (Round to three decimal places.)The FCF for year 8 is $ million. (Round to three decimal places.)

a.Initial investment = $1.5 millionUseful life = 10 yearsInvestment in NWC = 10% of predicted first…

Answered: Arnold Inc. is considering a proposal…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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