Voice-Soft Inc. is trying to determine whether to open a new product line, Voice
ID: 2771814 • 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 2013 to 2016, 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%.
Determine the NPV and IRR.
Should Voice-Soft make the investment and why? Explain.
Explanation / Answer
Project Cashflow Statement
Particulars 2013 2014 2015 2016
Sales $4000 $4000 $4200 $4200
(- ) Operating expenses $2800 $2800 $2700 $2700
(-) Depreciation $675 $675 $675 $675
(Note : Depreciation = Cost of asset $3100 - Salvage Value $400
Years of life 4
= $675 per year ) _______ _______ _______ ______
Operating Income (EBIT) $525 $525 $825 $825
(-) Tax 40% $210 $210 $330 $330
Operation Income after tax $315 $315 $495 $495
(+) Depreciation $675 $675 $675 $675
Cashflow $990 $990 $1170 $1170
Salvage Value - tax $240 $240 $240 $240
Initial capital investment $3100 $3100 $3100 $3100
Project cash flow $4330 $4330 $4510 $4510
NPV = Net cash inflow - initial investment
1 + r
0 = $17680 - $12400
1 + r
12400 = 17680 / 1 + r
1 + r = 1.42580
r = 42.58% ie. IRR = 42.58%
WACC = 12%
IRR is greater therefore screening for further analysis is needed and go for more profitable project
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