Unit 4ip for Financial Management

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Superior Manufacturing 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 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project requires a new plant that will cost a total of $1,000,000, which will be depreciated straight line over the next five years. The new line will also require an additional net investment in inventory and receivables in the amount of $200,000. Assume there is no need for additional investment in building and land for the project. The firm's marginal tax rate is 35%, and its cost of capital is 10%. 1. Prepare a statement showing the…show more content…
" Payabck Period= 2+447375/456750=2.98 Years" Year Cash Flow PV Factor @10% Present Value 0 -$1,200,000 1 -$1,200,000 1 $321,125 0.909091 $291,932 2 $482,000 0.826446 $398,347 3 $482,000 0.751315 $362,134 4 $482,000 0.683013 $329,212 5 $482,000 0.620921 $299,284 6 $377,000 0.564474 $212,807 7 $377,000 0.513158 $193,461 8 $577,000 0.466507 $269,175 NPV $1,156,351 3. Because the payback period is under 3 years, the project fits the limit policy, and it is acceptable. 4. Additional investment in land and building is a relevant cash flow, so it must be added to the initial investment, and depending on the amount of money invested in this topic, the NPV could become negative and in that case, the project will be rejected via the NPV criteria. Also, note that the

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