You are considering creating a new product line in warehouse space that originally cost you $48,997...

You are considering creating a new product line in warehouse space that originally cost you $48,997 9 years ago.

The required machinery would cost $9,515, should last 13 years, after which could be scrapped for $852.
Net working capital would need to immediately increase by $3,687, but could return to normal levels after 13 years.
Annual sales and operating costs are expected to be $9,189 and $1,999, respectively.
9% of customers are expected to switch over from your existing product lines.
Your firm's cost of capital (WACC) is 9% and effective corporate tax rate is 37%.
Your firm uses straight line depreciation as its depreciation method.

What is this project's net present value (NPV)? Enter your answer in decimal format to two decimal places (e.g., $1,538.72 would be entered as 1538.72).

Expert Solution





Machinery Cost = $ 9515
Scrap Value =$ 853
Life = 13 years
Depreciation =(Machine cost-Scrap value)/13
	9515-852/13= 666
working capital =$3687
PV of working capital at end of 13th year=3687 PVIF(9%, 13)
			1202.62
PV of scrap at end of 13th year = 853 PVIF (9%, 13)
		278.23

Annual sale =$9189
Operating cost =$1999
WACC = 9%

Calculation of cash inflow

	Sale	9189
Less	operating cost	1999
Less	Depreciation	666
	Income	6524
Less	Taxes(37%)	2414
	Net income	4110
Add	Depreciation	666
	cash flow	4776

PV of cashflow= 4776 PVAF(9%,13)=35757.45


Calculation of PV cash inflow
	($)
PV of cashflow	35757.45
PV of scrap	278.23
PV of working capital	1202.62
PV of cashinflow	37238.3


Calculation of PV cash outflow
	($)
Machinery cost	9515
Working Capital	3687
PV of cash outflow	13202

NPV=	PV of cashinflow -PV of cashoutflow
	NPV= 37238.30-13202
NPV =	$ 24036.30

jeff jeffy answered 1 year ago

You are considering creating a new product line in warehouse space that originally cost you $52,895...

You are considering creating a new product line in warehouse space that originally cost you $52,895 5 years ago. The required machinery would cost $6,786, should last 9 years, after which could be scrapped for $887. Net working capital would need to immediately increase by $4,332, but could return to normal levels after 9 years. Annual sales and operating costs are expected to be $7,097 and $1,688, respectively. 18% of customers are expected to switch over from your existing product...

Pak Foods Ltd. is considering a project of new product line that requires the initial cost...

Pak Foods Ltd. is considering a project of new product line that requires the initial cost of Rs. 15 million. The company is considering to raise the capital from debt and equity financing (no preferred stock). The target capital structure is 60% equity and 40% debt. The interest rate on new debt is 8.00%, and the cost of equity is 15.00%, and the tax rate is 40%. The project has an economic life of 7 years and has the following...

You are considering adding a new product to your firm's existing product line. It should cause...

You are considering adding a new product to your firm's existing product line. It should cause a 10 percent increase in your profit margin (i.e., new PM = old PM x 1.1), but it will also require a 25 percent increase in total assets (i.e., new TA = old TA x 1.25). You expect to finance this asset growth entirely by debt. If the following ratios were computed before the change, approximately what will be the new ROE if the...

A company is considering of a new product line that is believed to be marketable for...

A company is considering of a new product line that is believed to be marketable for the next 10 years. An initial investment of $215,000 will be required with an estimated salvage value of $40,000 at the end of 10 years. The annual receipts will start at $53,000, the first year and then increase by $2000 each year thereafter. Disbursements will start at $21,000 the first year and increase by $500 each year thereafter. What is the prospective rate of...

A Company is considering a new product line to supplement its range line. It is anticipated...

A Company is considering a new product line to supplement its range line. It is anticipated that the new product line will involve cash investment of $700,000 at time 0 and $1.0 million in year 1. After-tax cash inflows of $500,000 are expected in year 2, $300,000 in year 3, $700,000 in year 4, and $400,000 each year thereafter through year 10. Though the product line might be viable after year 10, the company prefers to be conservative and end...

CoolTech Inc. is considering a new refrigerated warehouse which will cost $7,000,000 and is expected to...

CoolTech Inc. is considering a new refrigerated warehouse which will cost $7,000,000 and is expected to have revenues of $900,000 at the end of each of the next 5 years and expenses of $200,000 for years 1-3 and $250,000 for years 4-5. The warehouse is depreciated for 40 years on a straight line basis and expects to have a salvage value of $1,000,000. At the end of 5 years, they expect to sell the warehouse for $6,000,000. Working capital requirements...

Murphy’s Motors is considering a new product line to fulfil a four-year contract. The new product...

Murphy’s Motors is considering a new product line to fulfil a four-year contract. The new product line will require an initial fixed asset investment in a machine of $160,000 with the machine to be depreciated straight-line to zero over its four-year tax life (i.e. fully depreciated with no book value at the end of four years). An initial investment in net working capital (NWC) of $90,000 will also need to be paid, with the assumption that the NWC will be...

A company is considering an investment of $600,000 in a new product line. The investment will...

A company is considering an investment of $600,000 in a new product line. The investment will be made only if it will result in a rate of return of 20% per year or higher. If the net cash flow is expected to be between $150,000 and $250,000 per year for 6 years. Use present worth analysis to determine if the decision to invest is sensitive to the projected range of revenue. Show how you arrived at your decision

Norister Inc. is considering introducing a new product line. This will require the purchase of new...

Norister Inc. is considering introducing a new product line. This will require the purchase of new fixed assets of $2.4 million. The company estimates that demand for the new product will be approximately 15,000 units per year, with a price per unit of $100. The variable cost of producing each unit of the product is $35, and fixed costs per year will be $100,000. Demand for the product will remain constant for six years, after which both demand and production...

Your corporation is considering investing in a new product line. The annual revenues for the new...

Your corporation is considering investing in a new product line. The annual revenues for the new product line are expected to be $306000 with variable costs equal to 50% of these sales. In addition annual fixed costs associated with this new product line are expected to be $59900. The old equipment currently has no market value. The new equipment cost $55400. The new equipment will be depreciated to zero using straight-line depreciation for the three-year life of the project. At...

Question