Reference no: EM133088356
Question - Air purifier manufacturer Chungjung Co., Ltd. is currently selling only one model in the market, and its performance is excellent. However, as new technologies are continuously emerging, Chungcheong Co., Ltd. cannot be complacent. Chungjung Co., Ltd. spent 750 million dollars to create a prototype of the new model and additionally spent 200 million dollars on marketing research to predict the sales volume of the new model. It costs 155,000 dollars per new model to produce, and the fixed cost is expected to be 4.7 billion dollars per year. Sales volume is estimated at 74,000, 95,000, 125,000, 105,000, and 80,000 over the next five years. The price of each new air purifier is $360,000. The new machine for air purifier manufacturing is priced at $ 2, 150 ,000 ,000 and is expected to be sold at 410,000,000 in five years, but the depreciation method has yet to be determined.
As mentioned earlier, Chungjung Co., Ltd. is already producing air purifiers, and sales of the old models will end in two years. If the new model is not released now, the sales of the old model will be 80,000 and 60,000, respectively, over two years. The price of the old model is $290,000, the variable cost per unit is $ 120,000, and the fixed cost is 1.8 billion dollars per year. If a new model is released, sales of the old model will decrease by 15,000 units per year, and the price should also be lowered to $ 255,000.
Net working capital should be set in proportion to sales, but the appropriate size of net working capital relative to sales has not yet been determined. The corporate tax rate is 35 percent, and the required rate of return for the new project of Chungcheong is to be determined at a level similar to the rate of return required in the same industry. ** For the parts not determined in the above description, make your own judgment and determine the appropriate value.
Describe the cash flow calculation process for the project in as much detail as possible and organize it in a table.
1. What is the payback period for a new project?
2. What is the profitability index of the new project?
3. What is the NPV of the new project?