Reference no: EM132390755

How do i calculate NPV for a new project analysis?

You must analyze a potential new product--a caulking compound that Cory Materials' R&D people developed for use in the residential construction industry. Cory's marketing manager thinks the company can sell 115,000 tubes per year for 3 years at a price of $3.25 each, after which the product will be obsolete. The required equipment would cost $150,000, plus another $25,000 for shipping and installation. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payable and accruals) would rise by $15,000. Variable costs would be 60% of sales revenues, fixed costs (exclusive of depreciation) would be $70,000 per year, and fixed assets would be depreciated under MACRS with a 3-year life, with applicable depreciation rates 33%, 45%, 15%, and 7%. When production ceases after 3 years, the equipment should have a market value of $15,000. Cory's tax rate is 40%, and it uses a 10% WACC for average-risk projects.

a) Assume that the project is of average risk, calculate the NPV.

b) Suppose you now learn that R&D costs for the new project were $30,000 and that those costs were incurred and expenses for tax purposes last year. How would this affect your estimate of NPV?

c) If the new project would reduce cash flows from Cory's other projects and if the new project would be housed in an empty building that Cory owns and could sell, how would those factors affect the project's NPV.