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

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 $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

Answer (a)

Net Present Value (NPV) $66689.45

(b) Since Project has Positive NPV, Project should be accepted.

Year 0 1 2 3 4 5 6 7 8 9 10 Operating Cash Flows 80000 80000 80000 80000 80000 80000 80000 80000 80000 80000 Change in Working Capital -40000 40000 Capital Spending -310000 Overhaul Cost -25000 Total Cash Flows -350000 80000 80000 80000 80000 80000 55000 80000 80000 80000 120000 Present Value Factor @ 14% 1 0.87719 0.76947 0.67497 0.59208 0.51937 0.45559 0.39964 0.35056 0.30751 0.26974 Total (NPV) Present Value of Cash Flows -350000 70175.20 61557.60 53997.60 47366.40 41549.60 25057.45 31971.20 28044.80 24600.80 32368.80 66689.45

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