Apply the Concept Lawson Company is considering production of an electronic tabl

Question

Apply the Concept

Lawson Company is considering production of an electronic tablet with the following associated data:

(See Exhibit 19B-1 & Exhibit 19B-2)

• Expected annual revenues, $1,543,000. • A projected product life cycle of five years. • Equipment, $1,647,000 with a salvage value of $189,000 after five years. • Expected increase in working capital, $195,000 (recoverable at the end of five years). • Annual cash operating expenses are estimated at $940,000. • The required rate of return is 12 percent.

Explanation / Answer

calculation of npv (figures in $)

NPV = $ 549,543

so this project is acceptable

calculation of npv (figures in $)

particulars amount of cash flows discounting factor @ 12% discounted value of cash flows equipment 1,647,000 working capital 195,000 total cash outflow 1,842,000 1 -1,842,000 total revenues 1,543,000 less operating expenses 940,000 net cash inflow 603,000 3.605 ( annuity value of 5 years ) 2,173,815 salvage value 189,000 recovery of working capital 195,000 total 384,000 0.567(discount factor if 5 year) 217,728

NPV = $ 549,543

so this project is acceptable

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