Company Zoulon is considering Project BA 421 for expanding its manufacturing flo

Question

Company Zoulon is considering Project BA 421 for expanding its manufacturing floor space. By expanding the floor space, they expect to create three more conveyor lines which will increase the production of their product, Zoutastic - an organically-based cleaning agent already popular amoung the millennials because of its eco-friendly compounds. In order to expand the floor, install the new lines and purchase the equipment, Zoulon is expecting a cost of $2.5 million. Its corporate policies are to recover their investment in 3 years or less and believe the cost of this capital is 15%. How much revenue would the sales of the Zoutastic product have to be in order to meet the corporate policies for ROI - return on investment?

NOTE: do not enter dollar sign ($) or commas (,). Show two decimals on all answers - .00, .25, .33, etc.

Explanation / Answer

Capital firm needs to invest = $2.5 million (Cash outflow)

Cost of capital = 15%

This need to be recovered in 3 years. Hence we find the cash inflows using Present value of annuity of 3 years with discount factor of 15%.

Using PVAF table, PV factor (3 years, 15%) = 2.28

Cash flow * PVAF = Cash outflow (For NPV to be equal to 0)
Cash flow * 2.28 = 2.5
Hence cash flow = $ 1.09 million

Assuming other cost factors to be zero and neglecting tax factor, since its not mentioned in case:

Revenue will equal to cash flow = $1.09 million /yr

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