Question

Solve problem

Net present value analysis

Emery communications company is considering the production and marketing of a communications system that will increase the efficiency of messaging for small businesses or branch offices of large companies .Each unit hooked into the system is assigned a mailbox number, which can be matched to a telephone extension number providing access to messages 24 hours a day . Up to 20 people .Personal codes can be reviewed recorded ,cancelled replied or deleted all during the same message play back . Indicators wired to the telephone blink whenever new messages are are present .

to produce this product , a $1.75 million investment in new equipment is required .The equipment will last 10 years but will need major maintaince costing $150,000 at the end of its sixth year . The salvage value of the equipment at the end of 10 years is estimated to be $100,000 . if this new system is produced , working capital must be increased by 90,000 . This capital will be restored at the end of the products 10 year life cycle .Revenue from the sale of the product are estimated at 1,65 million per year . cash operating expenses estimated at 1.32million per year .

Required

1- prepare sechdule of cash flows for the proposed project (Assume that no income tax) ?

2- Assuming that Emery's cost of capital is 12%. compute the project NPV.Should the product be produced ?

Answer 1