your firm is considering a new product development. an outlay of $90,000 is requ

Question

your firm is considering a new product development. an outlay of $90,000 is required for equipment, and an additional net working capital of $5000 is required. the project is expected to have a 4 year life, and th equipement will be depreciated on a straight line basis to a $10,000 book value. producing the new product will reduce current manufacturing expenses by $15,000 annually and increase earnings (revenue) before depreciation and taxes by $18,000 annually. stanton's marginal tax rate is 40 percent. stanton expects the equipment will have a marekt salvage value of $10,000 at the end of 4 years

What is the Total Cost at Time Zero of accepting this prject?

Explanation / Answer

Total cost at time of accepting project

Product development cost   : $ 90000

Add: net working capital :   $ 5000

                                         $ 95000

Here we can't add depreciation as it will add end of year and furthur increases in earning and saving in manufacturing cost also not considered as we only have to calculate present cost at the time of accepting project.

Add : Depreciation :             $10000

Less : saving in manufacturinng cost : -$ 15000

Add: increase in earning

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