3. (Ignore income taxes in this problem.) Axillar Beauty Products Corporation is

Question

3. (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

A PARTICULARS/YEAR 0 1 2 3 4 5 6 7 8 9 10 Initial Investment -375000 Working Capital Adj. -40000 40000 Machinery Overhaul -35000 Salvage Value 50000 Net Cash from shampoo 85000 85000 85000 85000 85000 85000 85000 85000 85000 85000 NET CASH GENERATED -415000 85000 85000 85000 85000 85000 50000 85000 85000 85000 175000 P.V. Factor (16%) 1.0000 0.8621 0.7432 0.6407 0.5523 0.4761 0.4104 0.3538 0.3050 0.2630 0.2267 P.V. of cashflow -415000 73275.86 63168.85 54455.9 46944.74 40469.61 20522.11 30075.51 25927.16 22351 39669.63 N.P.V. (16%) 1860.381 B THEY SHOULD GO AHEAD WITH THE PROJECT AS IT HAS A POSITIVE NPV.

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