New Project NPV Your firm is considering introducing a premium version of an exi

ID: 2757385 • Letter: N

Question

New Project NPV Your firm is considering introducing a premium version of an existing product. Doing so will require a significant investment. Below is information on the prospective investment. ? Cost of required equipment: $12,000,000 The equipment (and project) will last for 5 years Straight line depreciation will be used. The expected salvage value after 5 years is $2,000,000 ? Revenues per year: $10,000,000 ? Expected reduction in sales of existing product per year: $1,000,000 ? Cost of raw materials per year: $4,000,000 ? Cost of additional workers per year: $1,000,000 ? Necessary investment in additional Net Working Capital over the life of the project: $1,000,000 ? Corporate tax rate: 35% Assume that the appropriate discount rate for this project is 12%. The NPV of the cash flows that this project will generate is $0.71 million $1.62 million $1.74 million $-0.54 million

Explanation / Answer

Particulars

NPV

Initial Out Flow

-12

Revenue

Reduction Sale Price

-1

Cost of Raw Material

-4

Cost of labor

-1

Dep

-2.4

Income Before Tax

-12

1.6

Tax@35%

-0.56

PAT

-12

1.04

Add= Dep

2.4

NWC

-1

Salvage value

1.3

cashflow

-13

3.44

5.74

PV @ 12%

0.892857

0.797194

0.71178

0.635518

0.567427

-13

3.071429

2.742347

2.448524

2.186182

3.25703

0.71