(Ignore income taxes in this problem.) Allura Beauty Products Corporation is con

Question

(Ignore income taxes in this problem.) Allura Beauty Products Corporation is considering the production of a new conditioning shampoo that will require the purchase of new mixing machinery. The machinery will cost $500,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $50,000 at the end of 10 years. The machinery will also need a $35,000 overhaul at the end of Year 5. A $40,000 increase in working capital will be needed for this investment project. The working capital will be released at the end of the 10 years. The new shampoo is expected to generate net cash inflows of $110,000 per year for each of the 10 years. Axillar's discount rate is 15%. Items Year(s) Amount 15% Factor Present Value Cost of machinery Now ($500,000) 1 ($500,000) Working capital increase Now ($40,000) 1 ($40,000) Annual cash inflows 1–10 $110,000 5.019 552,090 Overhaul 5 ($35,000) 0.497 ($17,395) Salvage value 10 $50,000 0.247 12,350 Working capital release 10 $40,000 0.247 9,880 Net present value $16,925 Required: (a) What is the net present value of this investment opportunity? (b) Based on your answer to (a) above, should Axillar go ahead with the new conditioning shampoo?

Explanation / Answer

Evaluation of new conditioning shampoo Year Particulars cash Flow PV factor @15% PV of cashflows 0 Cost Of machine -500000 1        -5,00,000 0 Working capital -40000 1            -40,000 1 Expected General cashflows 110000 0.86956522              95,652 2 Expected General cashflows 110000 0.75614367              83,176 3 Expected General cashflows 110000 0.65751623              72,327 4 Expected General cashflows 110000 0.57175325              62,893 5 Expected General cashflows 110000 0.49717674              54,689 5 Over haul -35000 0.49717674            -17,401 6 Expected General cashflows 110000 0.4323276              47,556 7 Expected General cashflows 110000 0.37593704              41,353 8 Expected General cashflows 110000 0.32690177              35,959 9 Expected General cashflows 110000 0.28426241              31,269 10 Expected General cashflows 110000 0.24718471              27,190 10 Salvage 50000 0.24718471              12,359 10 Working Capital 40000 0.24718471                9,887 NPV              16,910 Since NPV is Positive & Hence Allura Beauty products corporation can proceed to go a head with the New conditioning Shampoo.

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