4. (10 points) (Ignore income taxes in this problem.) Axillar Beauty Products Co

Question

4. (10 points) (Ignore income taxes in this problem.) Axillar Beauty Products Corporation is considering the production of a new conditioning shampoo which will require the purchase of new mixing machinery. The machinery will cost S310,000, 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%. 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 shampo0?

Explanation / Answer

AS the Cash flow is Postive Project May be Accepted

Year 0 1 2 3 4 5 6 7 8 9 10 Cost of Machine -310000 Working Capital -40000 40000 Cash inflow from New Machine 80000 80000 80000 80000 80000 80000 80000 80000 80000 80000 Overhauling -25000 Salvage value 35000 Net Cash Flow -350000 80000 80000 80000 80000 80000 55000 80000 80000 80000 155000 1 0.877193 0.769468 0.674972 0.59208 0.519369 0.455587 0.399637 0.350559 0.307508 0.269744 Pv of Cash Flow -350000 70175.44 61557.4 53997.72 47366.42 41549.49 25057.26 31970.99 28044.72 24600.64 41810.29 Net Present Value 76130.37

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