You must analyze a potential new product-a caulking compound that Cory Materials' R&D people developed for use in the residential construction industry. Cory's marketing manager thinks they can sell 115,000 tubes per year at a price of $3.25 each for 3 years, after which the product will be obsolete. The required equipment would cost $150,000, plus another $25,000 for shipping and installation. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payable and accruals) would rise by $15,000. Variable cost per unit is $1.95, fixed costs be $70,000 per year, and fixed assets would be depreciated under MACRS with a 3-year life. [33%, 45%, 15%, 7%), when production ceases after 3 years, the equipment should have a maket value of $15,000. Cory's tax rate is 40%, and it uses a 10% WACC for average-risk projects g. If the risk of the project under consideration is greater than the risk of the company as a whole, would you expect the NPV to be: higher, lower, unchanged when compared to a project of average risk? circle the correct answer.] h. If Cory's management accepts a project that is riskier than the company as a whole, will Cory's cost of capital rise, fall, remain unchanged? circle the correct answer.]

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1cM

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You must analyze a potential new product-a caulking compound that Cory Materials R&D people developed for use in the residen

g. If the risk of the project under consideration is greater than the risk of the company as a whole, would you expect the NP

You must analyze a potential new product-a caulking compound that Cory Materials' R&D people developed for use in the residential construction industry. Cory's marketing manager thinks they can sell 115,000 tubes per year at a price of $3.25 each for 3 years, after which the product will be obsolete. The required equipment would cost $150,000, plus another $25,000 for shipping and installation. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payable and accruals) would rise by $15,000. Variable cost per unit is $1.95, fixed costs be $70,000 per year, and fixed assets would be depreciated under MACRS with a 3-year life. [33%, 45%, 15%, 7%), when production ceases after 3 years, the equipment should have a maket value of $15,000. Cory's tax rate is 40%, and it uses a 10% WACC for average-risk projects g. If the risk of the project under consideration is greater than the risk of the company as a whole, would you expect the NPV to be: higher, lower, unchanged when compared to a project of average risk? circle the correct answer.] h. If Cory's management accepts a project that is riskier than the company as a whole, will Cory's cost of capital rise, fall, remain unchanged? circle the correct answer.]

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