A manufacturing company is thinking of launching a new product. The
company expects to sell $950,000 of the new product in the first year
and $1,500,000 each year thereafter. Direct costs including labor and
materials will be 45% of sales. Indirect incremental costs are estimated
at $95,000 a year. The project requires a new plant that will cost a
total of $1,500,000, which will be a depreciated straight line over the
next 5 years. The new line will also require an additional net
investment in inventory and receivables in the amount of $200,000.
Assume there is no need for additional investment in building the land
for the project. The firm’s marginal tax rate is 35%, and its cost of
capital is 10%.
MUST show all work, including formulae and calculations used to arrive
at financial values.
Guidelines:
? Using the information in the assignment description:
o Prepare a statement showing the incremental cash flows for this
project over an 8-year period.
o Calculate the payback period (P/B) and the net present value (NPV) for
the project.
o Answer the following questions based on your P/B and NPV calculations:
 Do you think the project should be accepted? Why?
 Assume the company has a P/B (payback) policy of not
accepting projects with life of over 3 years.
 If the project required additional investment in land and
building, how would this affect your decision? Explain.
? A double-spaced Word document of 2 pages that contains your
calculation values, your complete calculations, any formulae that you
used, and your answers to the two questions listed in the assignment
guidelines.
o You must include your explanation of how you used Microsoft Excel for
your calculations if applicable.
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