What is the net nominal value of the equipment investment

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Reference no: EM132771193

Baldwin, a profitable widget maker, has developed an innovative new product called the Turbo-Widget (TW). Baldwin has invested $300,000 in R&D to develop TWs, and expects that TWs will capture a large share of the market. Yes this looks familiar.

Baldwin will have to invest $2 million in new equipment. The machines have a 5-year useful life, with an expected salvage value of $250,000. The machines will require a major overhaul after 3 years, costing $100,000.
Over the five-year product life-cycle, unit sales are expected to be 5,000 units, 8,000 units, 12,000 units, 10,000 units, and 6,000 units. Prices in the first year will be $480, and then will grow 2% annually.
Sales and administrative costs will be $150,000 every year. Production costs will be $500 / unit in the first year, but will decline 8% annually.
Baldwin must maintain approximately 2 weeks inventory of TWs, or 4% (2 / 52) of forecasted annual sales. Inventory can be stored in one of Baldwin's existing warehouses. The firm estimates that inventory will require 3,000 square feet and warehouse space costs $80 / s.f. / year.
Customers don't pay immediately. Baldwin expects to have 30days of sales outstanding as accounts receivable. Raw materials must be paid for immediately.
The tax rate is 34% and the after-tax cost of capital is 12%.

Problem 1: What is the net nominal value of the Equipment Investment Cashflow over 5 years of the project (ignoring the timing of cashflows)?

A. $2 million

B. -$2 million

C. -$1.9 million

D. $1.9 million

Problem 2: What is the net present value of the Equipment Investment Cashflow? After-tax cost of capital is 12%.

A. -$1.96 million

B. -$1.99 million

C. -$2.01 million

D. -$2.03 million

Reference no: EM132771193

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