1. You are considering expanding your product line, which currently consists of Lee’s Press-on Nails, to take advantage of the fitness craze. The new product you are considering introducing is “Press-on Abs.” You feel you can sell 100,000 of these per year for 4 years (after which time this project is expected to shut down because forecasters predict healthy looks will no longer be in vogue, being replaced with a couch-potato look). The press-on abs will sell for $6 each, with variable costs of $3 for each one produced, while annual fixed costs associated with production will be$90,000. In addition, there will be a $200,000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the simplified straight-line method down to zero over 4 years (depreciate equally each year over a four year life). This project will also require a onetime initial investment of $30,000 in net working capital associated with inventory. Finally, assume that the firm’s marginal tax rate is 34 percent. When the project terminates in four years, management believes it can sell the equipment for $35,000. Liquidation of cash flow results in a gain of $30,000. a. Calculate the initial investment for the project (Cfo).b. Construct an income statement showing sales revenue, less fixed and variable costsas well as depreciation, to arrive at EBIT.c. Calculate taxes and net income for each of the four years.d. Calculate terminal cash flow value.e. Assuming a required return of 14%, calculate NPV for the project. Should this projectmove forward? Explain.
1. You are considering expanding your product line, which currently consists of Lee’s Press-on Nails, to take advantage of the fitness craze. The new product you are considering introducing is “Press-on Abs.” You feel you can sell 100,000 of these per year for 4 years (after which time this project is expected to shut down because
$90,000. In addition, there will be a $200,000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be
Finally, assume that the firm’s marginal tax rate is 34 percent. When the project terminates in four years, management believes it can sell the equipment for $35,000. Liquidation of cash flow results in a gain of $30,000.
a. Calculate the initial investment for the project (Cfo).
b. Construct an income statement showing sales revenue, less fixed and variable costs
as well as depreciation, to arrive at EBIT.
c. Calculate taxes and net income for each of the four years.
d. Calculate terminal cash flow value.
e. Assuming a required return of 14%, calculate
move forward? Explain.
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