Answer Happy

B.1) Daylight firm is considering a new project that will last
for three years. The new project’s level of risk is the same as the
level of risk of Daylight current business. The marketing
department has estimated that the new project can sell 1000 units
per year at $100 per unit. The yearly cost of goods sold is 50% of
the sales revenues. The engineering department has estimated that
buying a machine to start with the new project will cost $90,000.
The new machine will be depreciated straight-line to zero over its
three years life. There will be no scrapping value of the machine
after three years. The working capitals needed for the new project
are 5,000 in year 1 and 5,000 in year 2. The tax rate is 21
percent, and the discount rate is 12 percent. i. Calculate free
cash flow for the new project. (4%) ii. Calculate NPV for the new
project. (2%) iii. Evaluate how sensitive the project’s NPV is to
changes in the discount rate (Hint: calculate how much the discount
rate can vary before the NPV reaches zero).