(Ignore income taxes in this problem.) Axillar Beauty Products Corporation is co
ID: 2427369 • Letter: #
Question
(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 $500,000, 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 5. 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 $110,000 per year for each of the 10 years. Axillar's discount rate is 15%.
Items
Year(s)
Amount
15% Factor
Present Value
Cost of machinery
Now
($500,000)
1
($500,000)
Working capital increase
Now
($40,000)
1
($40,000)
Annual cash inflows
1–10
$110,000
5.019
552,090
Overhaul
5
($35,000)
0.497
($17,395)
Salvage value
10
$50,000
0.247
12,350
Working capital release
10
$40,000
0.247
9,880
Net present value
$16,925
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?
Items
Year(s)
Amount
15% Factor
Present Value
Cost of machinery
Now
($500,000)
1
($500,000)
Working capital increase
Now
($40,000)
1
($40,000)
Annual cash inflows
1–10
$110,000
5.019
552,090
Overhaul
5
($35,000)
0.497
($17,395)
Salvage value
10
$50,000
0.247
12,350
Working capital release
10
$40,000
0.247
9,880
Net present value
$16,925
Explanation / Answer
CASH FLOW SCHEDULE 1 2 3 4 5 6 7 8 9 10 net cash in flow 110000 110000 110000 110000 110000 110000 110000 110000 110000 110000 overhauling exp 0 0 0 0 -35000 0 0 0 0 0 working capital 0 0 0 0 0 0 0 0 40000 salvage vlue 0 0 0 0 0 0 0 0 0 50000 total 110000 110000 110000 110000 75000 110000 110000 110000 110000 200000 calculatio of NPV particulars cash flows pv factor@15% pv of cash flows machinery + working capital -540000 1 -540000 1 110000 0.87 95700 2 110000 0.756 83160 3 110000 0.658 72380 4 110000 0.572 62920 5 75000 0.497 37275 6 110000 0.432 47520 7 110000 0.376 41360 8 110000 0.327 35970 9 110000 0.284 31240 10 200000 0.247 49400 NPV 16925 AS THE NPV OF THE PROJECT IS POSITIVE THE PROJECT IS FEASIBLE BUT BEFORE FINALISING irr MUST BE CONSIDERED
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