Reference no: EM133068647

Baxter Co, originally established 19 years ago to make sports gadgets, is now a leading producer in the market. 10 years ago, the company introduced its first line of high-performance sports gadgets. Company's management has sought opportunities in whatever businesses seem to have some potential for cash flow. Recently, vice president of the company, identified another segment of the market that looked promising and that he felt was not adequately served by larger manufacturers. That market was for fancy sports gadgets, and he believed many customers valued appearance and style above performance. He also believed that it would be difficult for competitors to take advantage of the opportunity because of both Baxter's cost advantages and its highly developed market skills. As a result, company investigated the marketing potential of trendy sports gadgets. Company sent a questionnaire to consumers in three markets and the results of the three questionnaires were much better than expected and supported the conclusion that the new product could achieve a 10% to 15% share of the market. Of course, some people at Baxter complained about the cost of the test marketing, which was $250.000 In any case, the company is now considering investing in a machine to support increased production level.Company management summarizes their assumptions as follows: - The new product line would be manufactured in a building owned by the firm. This vacant building, along with the land, can be sold today for $150,000 after taxes. The cost of the new equipment is $100,000 and is expected to last 5 years. - Depreciation of the machine will be based on 10 percent declining balance method. - At the end of 5 years, the machine will be sold at an estimated price of $30,000 - Production by year during the 5-year life of the machine is expected to be as follows: 5,000 units, 8,000 units, 12,000 units, 10,000 units, 6,000 units - The unit sell price of the gadgets in the first year will be $20.00 and will increase at 2% per year. First year production costs will be $10.00 per unit .Materials used to new products are rapidly becoming more expensive. Thus, production cash outflows are expected to grow at 10% per year.Based on Baxter's taxable income, the appropriate incremental corporate tax rate for this project is 34%. Baxter finds that it must maintain an investment in net working capital. It will purchase raw materials before production and sale, giving rise to a need to invest in inventory. The firm will also maintain a cash buffer against unforeseen expenditures.And, the firm's credit sales will not generate cash until payment is made at a later date. Thus, management determines that an initial investment in Year 0 in net working capital of $10,000 is required. In the final year of the project, net working capital will decline to zero as the project is terminated. Stated differently, the investment in working capital is to be completely recovered by the end of the project's life. Baxter's cost of funds is 10%..Expected payback period for project is 3 years

Required:

a)Build excel model of the problem;

b)Calculate project cash flows;

c)Calculate and interpret a)NPV,b)IRR,c)payback period for project of the project