Question

NEW PROJECT ANALYSIS You must analyze a potential new product—a caulking com- pound that Cory Materials’ R&D people developed for use in the residential construction industry. Cory’s marketing manager thinks the company can sell 115,000 tubes per year at a price of $3 25 each for 3 years, after which the product will be obsolete. The required equipment would cost $150,000, plus another $25,000 for shipping and installation. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payable and accruals) would rise by $15,000. Variable cost per unit is $1 95, fixed costs (exclusive of depreciation) would be $70,000 per year, and fixed assets would be depreciated under MACRS with a 3-year life. (Refer to Appendix 12A for MACRS depre- ciation rates.) When production ceases after 3 years, the equipment should have a market value of $15,000. Cory’s tax rate is 40%, and it uses a 10% WACC for average-risk projects.

Spreadsheet assignment: at instructor’s option Construct a spreadsheet that calculates the cash flows, NPV, IRR, payback, and MIRR.

Answer 1

	Cost of New Machine	$           150,000.00
	Shipping & Installation cost	$              25,000.00
	Total Investment Cost	$           175,000.00
	Investment in net working capital required
	Inventory & Accounts Receivable	$              35,000.00
	Accounts Receivable	$           (15,000.00)
	Investment in net working capital required	$              20,000.00
	B	C	D	E	F
14	Year	Year 0	Year 1	Year 2	Year 3
15	Investment	$         (175,000.00)
16	Working Capital	$           (20,000.00)
17	Total Revenue		$            373,750.00	$                  373,750.00	$ 373,750.00
18	Less: Variable cost		$            224,250.00	$                  224,250.00	$ 224,250.00
19	Less: Fixed Cost		$              70,000.00	$                     70,000.00	$    70,000.00
20	Less: Depreciation		$              58,327.50	$                     77,787.50	$    25,917.50
21	Profit before Tax		$              21,172.50	$                       1,712.50	$    53,582.50
22	Tax		$                 8,469.00	$                           685.00	$    21,433.00
23	After tax Operating Income=(A)		$              12,703.50	$                        (685.00)	$    32,149.50
24	Plus: Depreciation=(B)		$              58,327.50	$                     77,787.50	$    25,917.50
25	Operating Cash flow=(A)+(B)		$              71,031.00	$                     77,102.50	$    58,067.00
26	After tax Salvage Value=($15000*.60)				$      9,000.00
27	Recovery of Working Capital				$    20,000.00
28	Total Operating Cash Flow=(A)	$         (195,000.00)	$              71,031.00	$                     77,102.50	$    87,067.00
29	P.V Factor 17.5% for 5 years=(B)	1	0.909	0.826	0.751
30	P.V.=(A)*(B)	$         (195,000.00)	$              64,567.18	$                     63,686.67	$    65,387.32
31	NPV=(Total of P.V of all the three years)	$              (1,358.84)
32	Cumulative Cash flow	$         (195,000.00)	$          (123,969.00)	$                  (46,866.50)	$    40,200.50
33
34	Cost of Capital	10%
	Payback Period=	3 Years
	IRR(C28:F28)	10%
	MIRR(C28:F28,c34,c34)	10%
		Year 1	Year 2	Year 3
	Depreciation=	($175000*33.33%)	($175000*44.45%)	($175000*14.81%)