Question

In: Accounting

A company is developing a new product. The development of the product requires an initial investment...

A company is developing a new product. The development of the product requires an initial investment of $160,000 with further investments of $90,000 in year 1, $60,000 in year 2 and $10,000 in year 3. The company will launch the product on the market in year 3 and the company expects annual profits of $60,000 from year 3 to year 7. At the end of year 7, the company expects to terminate the production line and sell it to a competitor for $80,000. The company's required rate of return is 7%.

a. Calculate the NPV for this product.

Round to the nearest cent

b. Should the company proceed with developing the product?

Yes

No

Solutions

Expert Solution

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

Research and Development: The Thomas Company is in the process of developing a revolutionary new product....
Research and Development: The Thomas Company is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this product. As of year‐end (December 31, 2017), the product has not been manufactured for resale; however, a prototype unit was built and is in operation. Throughout 2017 the division incurred certain costs. These costs include design and engineering studies, prototype manufacturing costs, administrative expenses (including salaries of administrative personnel), and...
The Elkton Company is considering a new project that requires an initial investment of $24,000,000 to...
The Elkton Company is considering a new project that requires an initial investment of $24,000,000 to build a new plant and purchase equipment. The investment will be depreciated using the straight line method over 10 years.   The new plant will be built on some of the company's land which has a current, after-tax market value of $5,000,000.  The company will produce widgets at a cost of $130 each and will sell them for $420 each. Annual fixed costs are $500,000.  Sales (in units)...
The Elkton Company is considering a new project that requires an initial investment of $24,000,000 to...
The Elkton Company is considering a new project that requires an initial investment of $24,000,000 to build a new plant and purchase equipment. The investment will be depreciated using the straight line method over 10 years.   The new plant will be built on some of the company's land which has a current, after-tax market value of $5,000,000.  The company will produce widgets at a cost of $130 each and will sell them for $420 each. Annual fixed costs are $500,000.  Sales (in units)...
Your company is considering a new 3-year project that requires an initial investment in equipment of...
Your company is considering a new 3-year project that requires an initial investment in equipment of $3 million. Prior to this, you had engaged a consultant to study the feasibility of the new project and after an extensive market survey, the consultant confirmed your belief that the project would be viable. Your company is charged $100,000 for the feasibility study. The equipment will be depreciated straight line to zero over the 3 years of its useful life. In addition, you...
Your company is considering a new 3-year project that requires an initial investment in equipment of...
Your company is considering a new 3-year project that requires an initial investment in equipment of $3 million. Prior to this, you had engaged a consultant to study the feasibility of the new project and after an extensive market survey, the consultant confirmed your belief that the project would be viable. Your company is charged $100,000 for the feasibility study. The equipment will be depreciated straight line to zero over the 3 years of its useful life. In addition, you...
Seong Hotels is interested in developing a new hotel is Seoul. The initial investment of the...
Seong Hotels is interested in developing a new hotel is Seoul. The initial investment of the project is $20 million, but cashflows could differ if the government imposes a hotel tax. There is a 60% chance a hotel tax will be imposed and cash flows would be $2 million per year for 20 years. However, there is a 40% chance there will not be a tax imposed so cash flows would be $4 million per year for 20 years. They...
A new product requires an initial investment of $3.5 million and will be depreciated to an expected salvage of zero over 7 years.
A new product requires an initial investment of $3.5 million and will be depreciated to an expected salvage of zero over 7 years. The price of the new product is expected to be $35,000, and the variable cost per unit is $27,000. The fixed cost is $1.5 million. Assume that discount rate is 15%. Calculate accounting, cash, and financial break-evens.
a company is considering a new 3-year expansion project that requires an initial fixed asset investment...
a company is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.076 million. the fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $394,800. the project requires an initial investment in net working capital of $564000. the project estimated to generate $4512000 in annual sales, with costs of $1804800. the tax rate is 33 percent and the required return on...
Your company is considering a new 4-year project that requires an initial fixed asset investment of...
Your company is considering a new 4-year project that requires an initial fixed asset investment of $3.25 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year (which means can all be depreciated in year 1). At the end of the project, the asset can be sold for $440,000. The project is expected to generate $3.05 million in annual sales, with annual expenses of $955,000. The project will require an initial investment of $490,000 in...
A firm is considering a project that requires an initial investment of $300,000 in new equipment,...
A firm is considering a project that requires an initial investment of $300,000 in new equipment, which has a five-year life and a CCA rate of 30 percent. An initial investment in raw materials inventory of $50,000 is also required to support the project, which will rise to 15 percent of sales. The project will generate sales revenue of $400,000 in the first year, which will grow at 4 percent per year. Variable costs will be $220,000 for the first...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT