A company is considering launching a new product. It has ordered a feasibility study at a cost of $300,000 to investigate the consequences of the investment. The study yielded the following information. Expected sales for the next four years are the following:
Year
Units Sold
1
63,000
2
70,000
3
78,000
4
60,000
The sales price of the new product is estimated at $200 per unit. The logistics department forecasts that net working capital requirements (NWC) will represent 20% of current year sales, and that NWC will be recovered in full in year 5. Variable costs per unit are estimated at $140, and there are annual fixed costs of $600,000 every year. Because of marketing synergies, the new product is expected to increase sales of existing products by $150,000 per year for the next 4 years.
This project requires an initial investment (machine) of $8 million that can be depreciated linearly over 8 years to zero book value. At the end of the project in year 4, the machine can be sold for 40% of the purchase price. Taxable income and capital gains are taxed at a fixed rate of 35%, and the required rate of return by investors is 16%. Compute the NPV of the project.
A company is considering launching a new product. It has ordered a feasibility study at a cost of $300,000 to investigate the consequences of the investment. The study yielded the following information. Expected sales for the next four years are the following:
| Year | Units Sold |
| 1 | 63,000 |
| 2 | 70,000 |
| 3 | 78,000 |
| 4 | 60,000 |
The sales price of the new product is estimated at $200 per unit. The logistics department forecasts that net working capital requirements (NWC) will represent 20% of current year sales, and that NWC will be recovered in full in year 5. Variable costs per unit are estimated at $140, and there are annual fixed costs of $600,000 every year. Because of marketing synergies, the new product is expected to increase sales of existing products by $150,000 per year for the next 4 years.
This project requires an initial investment (machine) of $8 million that can be depreciated linearly over 8 years to zero book value. At the end of the project in year 4, the machine can be sold for 40% of the purchase price. Taxable income and capital gains are taxed at a fixed rate of 35%, and the required rate of return by investors is 16%. Compute the NPV of the project.
Related questions
| You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $470 per unit and sales volume to be 1,000 units in year 1; 900 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $260 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $186,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets at the end of year 3 is expected to be $42,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 35 percent and the required return on the project is 11 percent. |
| What change in NWC occurs at the end of year 1? |
