(Ignore income taxes in thisproblem.) Sampson Beauty Products Corporation is considering theproduction of a new conditioning shampoo that will require thepurchase of new mixing machinery. The machinery will cost $550,000,is expected to have a useful life of 10 years, and is expected tohave a salvage value of $55,000 at the end of 10 years. Themachinery will also need a $35,000 overhaul at the end of Year 5. A$50,000 increase in working capital will be needed for thisinvestment project. The working capital will be released at the endof the 10 years. The new shampoo is expected to generate net cashinflows of 95,000 per year for each of the 10 years.Sampson's discount rate is16%.
Items
Year(s)
Amount
16% Factor
Present Value
Cost of machinery
Now
($550,000)
1
($550,000)
Working capital increase
Now
($50,000)
1
($50,000)
Annual cash inflows
1â10
$95,000
4.833
459,135
Overhaul
5
($35,000)
0.476
($16,660)
Salvage value
10
$55,000
0.227
12,485
Working capital release
10
$50,000
0.227
11,350
Net present value
($133,690)
Required:
What is the net present value of this investment opportunity?
Based on your answer to (a) above, should Sampson go ahead with thenew conditioning shampoo?
(Ignore income taxes in thisproblem.) Sampson Beauty Products Corporation is considering theproduction of a new conditioning shampoo that will require thepurchase of new mixing machinery. The machinery will cost $550,000,is expected to have a useful life of 10 years, and is expected tohave a salvage value of $55,000 at the end of 10 years. Themachinery will also need a $35,000 overhaul at the end of Year 5. A$50,000 increase in working capital will be needed for thisinvestment project. The working capital will be released at the endof the 10 years. The new shampoo is expected to generate net cashinflows of 95,000 per year for each of the 10 years.Sampson's discount rate is16%.
Items | Year(s) | Amount | 16% Factor | Present Value | ||||
Cost of machinery | Now | ($550,000) | 1 | ($550,000) | ||||
Working capital increase | Now | ($50,000) | 1 | ($50,000) | ||||
Annual cash inflows | 1â10 | $95,000 | 4.833 | 459,135 | ||||
Overhaul | 5 | ($35,000) | 0.476 | ($16,660) | ||||
Salvage value | 10 | $55,000 | 0.227 | 12,485 | ||||
Working capital release | 10 | $50,000 | 0.227 | 11,350 | ||||
Net present value | ($133,690) | |||||||
Required:
What is the net present value of this investment opportunity?
Based on your answer to (a) above, should Sampson go ahead with thenew conditioning shampoo?
Related questions
(Ignore income taxes in this problem.) Simpson Beauty ProductsCorporation is considering the production of a new conditioningshampoo that will require the purchase of new mixing machinery. Themachinery will cost $700,000, is expected to have a useful life of10 years, and is expected to have a salvage value of $70,000 at theend of 10 years. The machinery will also need a $45,000 overhaul atthe end of Year 5. A $60,000 increase in working capital will beneeded for this investment project. The working capital will bereleased at the end of the 10 years. The new shampoo is expected togenerate net cash inflows of $150,000 per year for each of the 10years. Simpson's discount rate is 18%.
Items | Year(s) | Amount | 18% Factor | Present Value | ||||
Cost of machinery | Now | ($700,000) | 1 | ($700,000) | ||||
Working capital increase | Now | ($60,000) | 1 | ($60,000) | ||||
Annual cash inflows | 1â10 | $150,000 | 4.494 | 674,100 | ||||
Overhaul | 5 | ($45,000) | 0.437 | ($19,665) | ||||
Salvage value | 10 | $70,000 | 0.191 | 13,370 | ||||
Working capital release | 10 | $60,000 | 0.191 | 11,460 | ||||
Net present value | ($80,735) | |||||||
Required:
(a) What is the net present value of this investmentopportunity?
(b) Based on your answer to (a) above, should Simpson go ahead withthe new conditioning shampoo?
