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FIN - We are considering the introduction of a new product.

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Question;We are considering the introduction of a new product. Currently we are in the 34% tax bracket with a 15% discount rate. This project is expected to last five years and then,because this is somewhat of a fad project, it will be terminated. The following information describes the new project;Cost of new plant and equipment: $ 7,900,000 Shipping and installation costs: $ 100,000Unit sales:Year Units Sold1 70,0002 120,0003 140,0004 80,0005 60,000;Sales price per unit: $300/unit in years 1?4 and $260/unit in year 5.;Variable cost per unit: $180/unit;Annual fixed costs: $200,000 per year;Working capital requirements: There will be an initial working capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital willincrease during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. Depreciation method: Straight-line over 5 years assuming the plant and equipment have no salvage value after 5 years.

 

Paper#44507 | Written in 18-Jul-2015

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