Assume NEWC has an investment opportunity(similar to the air bag opportunity in

Question

Assume NEWC has an investment opportunity(similar to the air bag opportunity in Other People's Money).The firm can spend a product that will be sold in packets or units of twenty.Assume the firm forescats this product to have the same profit margin(NI available to common stock/sales) as the other products in its product portofolio: ($8.52 per 1,000 individual units) and that margin WACC is 11% for this risk class project product. If the firm's sells the same number of units or packets every year for the next twenty years,how many packets (or units) must be sold each year for this to be zero-NPV project?

- Assume CF equals net income available to common stockholders plus depreciation.You may assume depreciation is 45,500 per year.Ignore taxes and ignore changes in net operating working capital,along with salvage value of the equipment used in the production process.You should also ignore any potential tax consequences of salvage value.You should use only the information provided and assume it is complete.Hint: CF must be an annuity(annuity of money) or there are hundreds of answers to this question.

Q2- How would you decide whether(or not) to proceed with this project from a shareholder wealth maximizing perspective? Explain your rationale.What further information if any would you want to have or to know? 2-3 sentences

(Please just answer Q2)

Explanation / Answer

Present value of the future cashflows = ($8.52/1,000 * No. of units sold + $45,500) [(1+11%)20 - 1] / 11%

The no. of units sold is required in the question.

Nevertheless, the project should be undertaken only if the initial investment is less than or equal to the present value of the future cashflows. The above situation indicates that the project is a value addition and would lead to maximisation of the shareholder's wealth.

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