A manufacturing company is thinking of launching a new product. The company expe

Question

A manufacturing company 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 a depreciated straight line over the next 5 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 the land for the project. The firm's marginal tax rate is 35%, and its cost of capital is 10%.

To receive full credit on this assignment, please show all work, including formulae and calculations used to arrive at financial values.

Assignment Guidelines:

Your submitted assignment (125 points) must include the following:

Explanation / Answer

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amount needed -recovery in year3 = $447 375

cash flow= $ 456750

fraction = $447 375 /$ 456750 =0.98

pay back= 2.98 years

NPV= 1,075,689

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NPV--POSITIVE ,HENCE , PROJECT SHOULD BE ACPETED

AND AS THE pay back= 2.98 years IS LESS THAN 3 YEARS

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INCREASE IN COST -INCREASES THE pay back PERIOD

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