Question
In: Finance
NPV Holiday Co. wants to sell a new product. The company has been considering this idea...
NPV
Holiday Co. wants to sell a new product. The company has been considering this idea for a while now and spent $300,000 in R&D. They have also ordered a marketing analysis from a consulting firm, for which they have paid 50% of the $80,000 contract. The balance will be paid next week.
The new product will require an investment in a new equipment of $750K and an increase in net working capital of $75K. The project will last 7 years. Half of the change in net working capital will be recovered in year 6 and the rest the in the last year.
The equipment will be sold for $150K when the project ends. The project will generate annual sales of $300K with $130K of operating expenses. Holiday Co. has a tax rate of 35%, a WACC of 9% and a CCA depreciation rate of 30%.
Calculate the NPV of this project for Holiday Co.
Solutions
Expert Solution
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Note : R&D = 300000 is sunk cost and will not be considered.
Half cost of market analysis is sunk cost and will not be considered
Project should not be accepted as it as negative NPV
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