A Manufacturing Company Is Thinking of Launching a New Product. the Company Expects to Sell $950,000 of the New Product in the First Year and $1,500,000 Each Year Thereafter. Direct Costs Will Be 45% of Sales. Indirect

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Payback and NPV Tiffanie Lampley FINA 310, Unit 4 IP AIU Instructor Morales December 8, 2013 Abstract This essay includes projected cash flows for the next eight years. The payback period method is used to determine the amount of time it would take the company to recoup initial investment costs. The net present value is then tabulated in order to determine whether the project should be rejected or accepted. Payback and NPV A manufacturing company is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 45% of sales. Indirect incremental costs are estimated at $95,000 a…show more content…
Using the subsequent investment balance of $1,422,125 divided by the annual net cash flows of $474,500 yields a payback period of 3 additional years for a total of four years to pay off initial investment. The company automatically rejects all projects with a payback period over three years, therefore based only on this criteria the project would be rejected. However, the net present value method can also be utilized to determine if the company should undertake the project or not. The net present value is based on the calculation of present value. Present value is calculated by dividing the annual cash flow by the capital rate (10%) plus one raised to the power of the year calculated. So for the first year the equation looks like this: PV=277,875/(1+0.10)^1. Then: Year 2:PV= 474,500/1.10^2 or 474,500/1.21 Year 3: PV=474,500/1.10^3 or 474,500/1.331 Year 4: PV= 474,500/1.10^4 or 474,500/1.4641 Year 5: PV= 474,500/1.10^5 or 474,500/1.61051 Year 6: PV= 474,500/1.10^6 or 474,500/1.771561 Year 7: PV= 474,500/1.10^7 or 474,500/1.9487171 Year 8: PV= 474,500/1.10^8 or 474,500/2.1435888 The net present value is equal to the above totals after calculation. These figures are given in the above table. The net present value is equivalent to $2,352,672.44 minus the

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