A firm is considers introducing a new production line for its new product the Squeaky Clean....

A firm is considers introducing a new production line for its new product the Squeaky Clean. The production start-up costs are estimated to be £30,000 while the cash revenues are estimated at £20,000 per year. Cash costs (including taxes) will be £14,000 per year. Production will be wound down in eight years’ time and the salvage value at this time will be £2,000. The discount rate on similar projects is 15%. The objective of the firm is to maximize shareholder wealth.

Required (a) Use the Net Present Value (NPV) method to evaluate whether the investment should take place.

(b) If there are 1,000 shares of stock outstanding, what will be the effect on the price per share of taking this investment? (3 amrks)

Solutions

Expert Solution

The NPV of the project is Negative £2,422.27. If this project is undertaken price per share will decrease by £2.42 per share

The same with Excel Formulas shown:

jeff jeffy answered 1 year ago

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