Juno Manufacturing is thinking of launching a new product. The company expects t
ID: 2664076 • Letter: J
Question
Juno Manufacturing is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project requires a new plant that will cost a total of $1,000,000, which will be depreciated straight line over the next five years. The new line will also require an additional net investment in inventory and receivables in the amount of $200,000. Assume there is no need for additional investment in building and land for the project. The firm's marginal tax rate is 35%, and its cost of capital is 10%. Based on this information you are to complete the following tasks.1. Prepare a statement showing the incremental cash flows for this project over an 8-year period.
2. Calculate the Payback Period and the NPV for the project.
3. Based on your answer for question 2, do you think the project should be accepted? Why? Assume Superior has a P/B policy of not accepting projects with life of over three years.
4. If the project required additional investment in land and building, how would this affect your decision? Explain.
Explanation / Answer
3. Here the net present value is positive . So the project should be accepted.
4.If the additional investment is not more than the net present value ,then the project should be accepted.
Details Statement showing the Net Incomes for the First 8 years Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Sales 950,000.00 950,000.00 950,000.00 950,000.00 950,000.00 950,000.00 950,000.00 950,000.00 Less: Labour and Material (522,500.00) (522,500.00) (522,500.00) (522,500.00) (522,500.00) (522,500.00) (522,500.00) (522,500.00) Indirect Incremental cost (80,000.00) (80,000.00) (80,000.00) (80,000.00) (80,000.00) (80,000.00) (80,000.00) (80,000.00) Depreciation (200,000) (200,000) (200,000) (200,000) (200,000) EBT 147,500.00 147,500.00 147,500.00 147,500.00 147,500.00 347,500.00 347,500.00 347,500.00 Less: Tax 51625 51625 51625 51625 51625 121625 121625 121625 Net Income 95,875.00 95,875.00 95,875.00 95,875.00 95,875.00 225,875.00 225,875.00 225,875.00 Statement showing Net cashflows Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Sales 950,000.00 950,000.00 950,000.00 950,000.00 950,000.00 950,000.00 950,000.00 950,000.00 Less: Labour and Material (522,500.00) (522,500.00) (522,500.00) (522,500.00) (522,500.00) (522,500.00) (522,500.00) (522,500.00) Indirect Incremental cost (80,000.00) (80,000.00) (80,000.00) (80,000.00) (80,000.00) (80,000.00) (80,000.00) (80,000.00) Tax Amount (51,625.00) (51,625.00) (51,625.00) (51,625.00) (51,625.00) (121,625.00) (121,625.00) (121,625) Net Cash Flow Amount 295875 295875 295875 295875 295875 225875 225875 225875 Year Cashflows Cumulative Cash flows 0 ($1,000,000) ($1,000,000) 1 $295,875 ($704,125) 2 $295,875 ($408,250) 3 $295,875 ($112,375) 3 + [$112,375 / $295,875] 4 $295,875 3+ 0.378 5 $295,875 3.38 years 6 $225,875 7 $225,875 Payback Period = 3.38 years 8 $225,875 Year Cash flows PV Factor at 10% NPV 0 ($1,000,000) 1 ($1,000,000) 1 $295,875 0.9091 $268,979.96 2 $295,875 0.8264 $244,511.10 3 $295,875 0.7513 $222,290.89 4 $295,875 0.683 $202,082.63 5 $295,875 0.6209 $183,708.79 6 $225,875 0.5645 $127,506.44 7 $225,875 0.5132 $115,919.05 8 $225,875 0.4665 $105,370.69 Net Present Value $470,3703. Here the net present value is positive . So the project should be accepted.
4.If the additional investment is not more than the net present value ,then the project should be accepted.
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