Kraemer Company is launching a new product. The following information relates to

Question

Kraemer Company is launching a new product. The following information relates to the launch: 1) 4 year project life 8) Sales for first year $    200,000 2) New equipment cost $ (200,000) 9) Sales increase per year 5% 3) Equipment ship & install cost $    (35,000) 10) Operating cost: $ (120,000) 4) Related start up cost $      (5,000)     as a percent of sales 60% 5) Inventory increase $     25,000 11) Depreciation expense - SL $    (60,000) 6) Accounts Payable increase $       5,000 12) Tax rate 40% 7) Equip. salvage value after tax $     15,000 13) Hurdle Rate 10% Cash Flow Framework: Year 0 1 2 3 4 Investments:      Total Operations:      Total Terminal: Kraemer Company is launching a new product. The following information relates to the launch: 1) 4 year project life 8) Sales for first year $    200,000 2) New equipment cost $ (200,000) 9) Sales increase per year 5% 3) Equipment ship & install cost $    (35,000) 10) Operating cost: $ (120,000) 4) Related start up cost $      (5,000)     as a percent of sales 60% 5) Inventory increase $     25,000 11) Depreciation expense - SL $    (60,000) 6) Accounts Payable increase $       5,000 12) Tax rate 40% 7) Equip. salvage value after tax $     15,000 13) Hurdle Rate 10% Cash Flow Framework: Year 0 1 2 3 4 Investments:      Total Operations:      Total Terminal:

Explanation / Answer

Cash Flow Framework: Year 0 1 2 3 4 Investments: New equipment cost ($200,000) Equipment ship & install cost $    (35,000) Related start up cost $      (5,000) Working Capital - 25000-5000 $      (20,000) $        20,000 7) Equip. salvage value after tax $     15,000      Total ($220,000) $0 $0 $0 $20,000 Operations: Sales $      200,000 $210,000.00 $220,500.00 $231,525.00 Operational Cost $      120,000 $      126,000 $     132,300 $     138,915 Depreciation $        60,000 $        60,000 $        60,000 $        60,000 Profit $        20,000 $        24,000 $        28,200 $        32,610 Tax $           8,000 $           9,600 $        11,280 $        13,044 Profit after tax $        12,000 $        14,400 $        16,920 $        19,566 Add, Depreciation $        60,000 $        60,000 $        60,000 $        60,000 Cash Flow $        72,000 $        74,400 $        76,920 $        79,566      Total ($220,000) $72,000 $74,400 $76,920 $99,566 Hurdle rate 10% Terminal: NPV calculation from Excel - initial investment of 2,20,000. $32,738.20 Since the net cash flow from the project is positive the project can be taken up.

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