Carpet City is considering an investment of $80 million in plant and machinery. The plant and machinery will be scrapped after 4 years with a salvage value of $20 million.
The plant and machinery belong to the 3 year recovery period class for depreciation purposes (MACRS).
This investment is expected to produce sales of $130 million in year 1. Subsequent sales are expected to increase by 8% each year for the remaining 3 years.
Variable operating costs are expected to be $100 million in year 1 and to increase by 7% each year for the remaining 3 years.
Fixed operating costs are $3 million per year.
The project requires a $7,000,000 investment in initial net working capital. At the end of year 4, there is a $4,500,000 return of net working capital.
The tax rate is 40%. Any operating losses can be used against the firm- other income (The investment is only one part of the firm- total operations) to generate a tax savings for that year. a. The project is riskier than average, and a beta of 1.1 seems appropriate for the risk. The risk-free return is 4% and the market risk premium is 6%. Find the required return for the project. b. What is the internal rate of return? c. Select 2 numeric variables you feel are important in the success of the project. Make pessimistic and optimistic estimates of each variable selected. Conduct two sensitivity analyses (one for each variable) OR one scenario analysis (allowing both variables to change simultaneously). For sensitivity analysis, you will use a one-way data table. For scenario analysis, use a two-way data table.
USA 
India