Kramerica Industires plans to introduce a new product to the market. Last week,

Question

Kramerica Industires plans to introduce a new product to the market. Last week, Kramerica hired a marketing firm to develop a TV ad for the product. The marketing firm will develop the ad regardless of Kramerica's decision to continue the project or not. The project will require additional working capital of $300,000 which will be recovered at the condusion of the project. The firm has spent $250,000 on R&D; for this project. To launch the project Kramerica will have to invest $26 million today in plant and machinery. The plant and machinery have an economic life of 20 years and a salvage value of $4 million. The project is expected to generate sales of $9 million per year for 20 years. Of these, 20% are due to lost sales of the existing products of the company. The incremental variable costs of producing the product is $3.4m. Fixed costs are $700,00 per yeat Kramerica's hired. The accountants have allocated $400,000 in managerial salaries to the project but no additional managers need to be company uses straight line depreciation. It has a marginal tax rate of 40% and a 10% cost of ca The initial cash flow at time 0 (t-0) is-s . pital. O25,700,000 26,700,000 27,700,000 26,300,000 27,300,000

Explanation / Answer

Working capital $       (300,000) Plant and machinery $ (26,000,000) Initial investment $ (26,300,000)

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