A manufacturing company is thinking of launching a new product. The company expects to sell $950000 of the new product in the first year and $1500000 each year thereafter. Direct costs including labor and materials will be 45% of sales. Indirect incremental costs are estimated at $95000 a year. The project requires a new plant that will cost a total of $1500000 which will be a depreciated straight line over the next 5 years. The new line will also require an additional net investment in inventory and receivables in the amount of $200000.
Assume there is no need for additional investment in building the land for the project. The firm’s marginal tax rate is 35% and its cost of capital is 10%.
To receive full credit on this assignment please show all work including formulae and calculations used to arrive at financial values.
Your submitted assignment (130 points) must include the following:
You will be graded on the accuracy of your value calculations as well as your demonstrated understanding of payback periods net present value and cash flows.
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