Additional net investment in inventory and receivables

Reference no: EM13792171

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 45% of sales. Indirect incremental costs are estimated at $95,000 a year. The project requires a new plant that will cost a total of $1,500,000, 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

Using the information in the assignment description:
- Prepare a statement showing the incremental cash flows for this project over an 8-year period.
- Calculate the payback period (P/B) and the net present value (NPV) for the project.
- Answer the following questions based on your P/B and NPV calculations:
  - Do you think the project should be accepted? Why?
    - Assume the company has a P/B (payback) policy of not accepting projects with life of over 3 years.
  - If the project required additional investment in land and building, how would this affect your decision? Explain.

Your submitted assignment (130 points) must include the following:

A double-spaced Word document of 2-3 pages that contains your calculation values, your complete calculations, any formulae that you used, and your answers to the two questions listed in the assignment guidelines.
- You must include your explanation of how you used Excel for your calculations if applicable.

Reference no: EM13792171

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