Assume you represent the financial management of Deluxe and have been asked to evaluate the marketing department’s proposal to introduce a new range of clothing. An initial investigation into the potential markets has been undertaken by a firm of consultants at a cost of $100,000 but this amount has not yet been paid. It is intended to settle the amount due in three months’ time. With the help of a small multi-department team of staff you have estimated the following cash flows for the proposed project: • The initial investment required would be $46 million: This comprises $30 million for fixed assets and $16 million for net current assets (working capital).
• For accounting purposes, fixed assets are depreciated on a straight-line basis over three (3) years after allowing for a residual value of 10%. • The value of net current assets at the end of the evaluation period can be assumed to be the same as at the start of the period. • Earnings before taxes are forecast to be $14 million in 2018, $17million in 2019 and $22 million in 2020. The following information is also relevant: • The proposed project is to be evaluated over a three-year time horizon. The firm uses Net Present Value and Internal Rate of Return methods to evaluate projects.