(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 $375,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $75,000 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 17%.

Required:

Part A: What is the net present value of this investment opportunity?

Part B: Based on your answer to (a) above, should Axillar go ahead with the new conditioning shampoo?

Explanation / Answer

Part B:

Since NPV is negative, Axillar should not produce the new conditioning shampoo.

Initial Investment : Cost 375000 Working Capital 40000 415000 Year 6: Net Cash Flow 85000 Overhaul -35000 50000 Terminal Cash Flow Net Cash Flow 85000 Salvage Value 75000 Working capital recovery 40000 200000 Part A: NPV: Year Cash Flow PVF (17%) PV of CF 0 -415000 1 -415000 1 85000 0.854700855 72649.57265 2 85000 0.730513551 62093.65184 3 85000 0.624370556 53071.4973 4 85000 0.533650048 45360.2541 5 85000 0.456111152 38769.44795 6 50000 0.389838592 19491.92959 7 85000 0.333195378 28321.60709 8 85000 0.284782374 24206.50179 9 85000 0.243403738 20689.31777 10 200000 0.208037383 41607.47666 -8738.743276

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