Reference no: EM132368143

Question

Corporation developed a new product that it believes will have broad market appeal. The company's recent cost and marketing studies revealed the following:

a. New equipment costing $360,000 would need to be acquired to produce the product. The equipment is estimated to have a six-year useful life, with no salvage value at the end of the six years.

b. Sales in units over the next six years are projected as follows:

Year 1-20,000

Year 2-30,000

Year 3-50,000

Years 4-6 - 60,000

Production and sales of the new product would require working capital of $450,000 to finance accounts receivable, inventory, and day-to-day cash needs. This working capital would be released at the end of the project's life.

c. The product would sell for $35 each; variable costs for production, administration, and sales would be $22 per unit.

d. Fixed costs would total $240,000 per year. These fixed costs are for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the new equipment (see item a. above). Note that the annual depreciation on the new equipment referenced in item a. above is on a straight-line basis over the six-year life.

e. To gain rapid entry into the market, the company would need to advertise heavily. The advertising program would be:

Year 1-2 - $200,000

Year 3 - $180,000

Years 4-6 - $120,000

f. The company's required rate of return is 20%. Ignore taxes.

Please show how came to this answer

1. Determine the net present value of the investment, construct a schedule that shows the calculation of cash flows for the current year and for years 1 through 6. Then, calculate the NPV assuming a discount factor of 20%. Ignore taxes.

2. Would recommend that John Corporation accept the new product in its product line? Why or why not?