Managerial finance problem solving

ABC corporation projects their future unit sales for a new headphone. The projected unit sales
are as below.
Unit sales
1
70000
2
80000
3
120000
4
100000
5
90000
To produce the headphones, the initial net working capital of $2,000,000 is required and
additional net working capital is also required each year, which is 20% of the projected sales
increase for the following year. The net working capital will be recovered at the end of a
project. In addition, the initial installation cost of the machine for production is $20,000,000.
The machine will be depreciated for tax purposes using straight-line depreciation with the
useful life of 8 years. Also, costs and unit price are as below.
Fixed cost
Variable cost
Price
$3,250,000 per year
$280 per unit
$425 per unit
In five years, the machine can be sold for about 20% of its acquisition cost. The tax rate is 30%
and the required rate of return is 18%.
Required
(a) What is the NPV of the project? Explain and defend your processes, answer, and
calculations clearly.
(b) Assuming that the project can be repeated indefinitely, what is the NPV∞ of the project?
Suppose that there is another project with the NPV of $4 million and the NPV∞ of $6
million. Which project would you choose, assuming that two projects are mutually
exclusive and can be repeated indefinitely? Why? Explain and defend your processes,
answer, and calculations clearly.