Voice-Soft Inc. is trying to determine whether to open a new product line, Voice
ID: 2654238 • Letter: V
Question
Voice-Soft Inc. is trying to determine whether to open a new product line, Voice-Write, a speech-to-text product, which is expected to be competitive for four years. The cost of the new capital equipment including shipping and installation is $3100. The equipment will last for 4 years. They use simple straight line depreciation and the salvage value is $400. For 2016 to 2019, sales are expected to be $4000, 4000, 4200, and 4200; and operating expenses, $2800, $2800, $2700, $2700. The company is expecting to lose operating income of $200 per year due to Voice-Write cannibalizing its current product, Voice-Speak. Regardless of your answer to part I above (WACC calculation) assume Voice-Soft has a tax rate of 40% and a weighted average cost of capital (WACC) of 12
Complete the Project cash flow statement below and then answer questions.
2015
2016
2017
2018
2019
Sales
Operating Expenses
Opportunity Costs
Depreciation
Operating Income (EBIT)
Taxes
Operating Income after taxes
Depreciation
Cash Flow
Salvage Value
Salvage Tax
Net Salvage Value
Initial capital Investment
Project Cash Flow
Determine the Net Present Value, IRR and should Voice soft make an investment? why?
2015
2016
2017
2018
2019
Sales
Operating Expenses
Opportunity Costs
Depreciation
Operating Income (EBIT)
Taxes
Operating Income after taxes
Depreciation
Cash Flow
Salvage Value
Salvage Tax
Net Salvage Value
Initial capital Investment
Project Cash Flow
Explanation / Answer
Solution:
NPV
The Project should be Accepted, as NPV is positive
IRR
2015 ($) 2016 ($) 2017 ($) 2018 ($) 2019 ($) Sales 4000 4000 4200 4200 Operating Expenses 2800 2800 2700 2700 Opportunity Costs 200 200 200 200 Depreciation 675 675 675 675 Operating Income (EBIT) 325 325 625 625 Taxes 130 130 250 250 Operating Income after taxes 195 195 375 375 Depreciation 675 675 675 675 Cash Flow 870 870 1050 1050 Salvage Value 400 Salvage Tax 0 Net Salvage Value 400 Present Value Factor @ 12 % 0.893 0.797 0.712 0.636 Present Value of Cashflows 776.79 693.56 747.37 921.50 Total Present Value of Cash Flows 3139.21 Initial capital Investment 3,100 Project Cash Flow/ NPV 39.21Related Questions
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