Reference no: EM132028065
Question: Parker Products manufactures a variety of household products. The company is considering introducing a new detergent. The company's CFO has collected the following information about the proposed product
The project has an anticipated economic life of 4 years.
The company has already spent already spent $100,000 on in market research to determine feasibility of the product.
The company will have to purchase a new machine to produce the detergent. The machine has an up-front cost of $2 million. The machine will be depreciated on a straight-line basis to $0 over 4 years. The company anticipates after four years, it will be able to sell the machine for $200,000.
To start the project, it will require $60,000 of additional inventory and $40,000 for additional accounts receivable. Short-term payables are expected to increase by $20,000. The net working capital will decline by one-fourth of the original amount each year until it returns to its original level at the end of the project (i.e. there will be no NWC left after the fourth year).
The detergent is expected to generate sales revenue of $3 million per year for each of the four years. Variable operating costs are expected to equal 50 percent of sales revenue. Fixed operating costs total $500,000.
The new detergent is expected to reduce after-tax cash flows of the company's existing products by $300,000 a year.
The company has a 12 percent required return.
The company has a marginal tax rate of 30 percent.
What is the net present value of the proposed project? Should you accept or reject the project?
Show work please.