(Ignore income taxes in this problem). Axillar Beauty Products Corportaion is co
ID: 2462327 • Letter: #
Question
(Ignore income taxes in this problem). Axillar Beauty Products Corportaion is considering the production of a new conditioning shampoo which will require the purchase of new mixing machinery. The machinery will cost $310,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $35,000 at the end of 10 years. The machinery will also need a $25,000 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 $80,000 per year for each of the 10 years. Axillar's discount rate is 14%.
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
The result given to you may differ due to difference in discount factor used. As the working capital requiremnt timimg not mentioned assuming it in year 0 , if not result will vary Axillar beauty Products Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Cost Of Machine (310,000) Over haul (25,000) Net Working Capital (40,000) 40,000 Net Cash Flow 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 Salvage 35,000 Total Cash flow (350,000) 80,000 80,000 80,000 80,000 80,000 55,000 80,000 80,000 80,000 155,000 Discount Factor @14% 1 0.8772 0.7695 0.6750 0.5921 0.5194 0.4556 0.3996 0.3506 0.3075 0.2697 PV of cash Flows (350,000) 70,175 61,557 53,998 47,366 41,549 25,057 31,971 28,045 24,601 41,810 a NPV $ 76,130 b Based on NPV . Axilliar should go for the new conditioning shampoo.
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