Reference no: EM132598853

YNC Inc. decides to get into the business of producing shampoo or soup.

1. To get in the business of shampoo they need to invest in a shampoo producing machine which costs $72,000. The useful life of the machine is 7 years and the salvage value is $7000. The cash sales from selling the shampoo will be around $47,000 and all expenses that are paid in cash (materials, labor etc.) are $30,000. In order to run the project they need to invest around $5,000 in working capital.
2. To get in the business of soap they need to invest in a soap producing machine which costs $62,000. The useful life of the machine is 6 years and the salvage value is $7000. The cash sales from selling the soap will be around $37,000 and all expenses that are paid in cash (materials, labor etc.) are $20,100. In order to run the project they need to invest around $11,000 in working capital.
3. Both machines are depreciated using the straight-line method and the company pays 10% tax on its net income. The discount rate is 12%.

Required:

Question a. Construct the cash flow time-line.

Question b. What is the net present value of each project? In which one they should invest?

Question c. What is the Internal Rate of Return of each project? In which one they invest according to IRR?

Question d. Calculate the Payback Period of this investment to the nearest month. In which one they should invest according to this method?

Question e. In which Machine should they invest considering all methods, express your opinion.

Question f. Discuss the advantages and disadvantages of each of the 3 methods above.