(TCO G) - (Ignore income taxes in this problem.) Axillar Beauty Products Corpora

Question

(TCO G) - (Ignore income taxes in this problem.) Axillar Beauty Products Corporation is considering the production of a new conditioning shampoo that will require the purchase of new mixing machinery. The machinery will cost $375,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $50,000 at the end of 10 years. The machinery will also need a $35,000 overhaul at the end of Year 6. A $40,000 increase in working capital will be needed for this investment project. The working capital will be released at the end of the 10 years. The new shampoo is expected to generate net cash inflows of $85,000 per year for each of the 10 years. Axillar's discount rate is 16%.

Required:
(a) What is the net present value of this investment opportunity?
(b) Based on your answer to (a) above, should Axillar go ahead with the new conditioning shampoo?

Explanation / Answer

Statemnet showing Cash flows Particulars Time PVf@16% Amount PV Cash Outflows (Purchase)                          -                1.00 (375,000.00)    (375,000.00) Cash Outflows (Overhaul)                     6.00              0.41     (35,000.00)      (14,365.48) Cash Outflows (WC)                          -                1.00     (40,000.00)      (40,000.00) PV of Cash outflows    (429,365.48) Cash inflows                     1.00          0.8621        85,000.00         73,275.86 Cash inflows                     2.00          0.7432        85,000.00         63,168.85 Cash inflows                     3.00          0.6407        85,000.00         54,455.90 Cash inflows                     4.00          0.5523        85,000.00         46,944.74 Cash inflows                     5.00          0.4761        85,000.00         40,469.61 Cash inflows                     6.00          0.4104        85,000.00         34,887.59 Cash inflows                     7.00          0.3538        85,000.00         30,075.51 Cash inflows                     8.00          0.3050        85,000.00         25,927.16 Cash inflows                     9.00          0.2630        85,000.00         22,351.00 Cash inflows                   10.00          0.2267        85,000.00         19,268.11 Cash inflows(Salavge Value)                   10.00          0.2267        50,000.00         11,334.18 Cash inflows(WC)                   10.00          0.2267        40,000.00           9,067.34 PV of Cash Inflows      431,225.86 NPV           1,860.38 Yes it should go ahead since NPV is positive

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