Reference no: EM132777960
Question - 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%.
Answer the following questions.
1. What is the sunk cost of the TW project?
A. $0
B. $300,000
C. $2 million
D. $2.3 million
2. What is the Net Operating Income Before Tax of the 4th year of the project (in thousands)?
A. $534
B. $820
C. -$297
D. $703
3. 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
4. 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
5. What is the 2nd year net working capital of the project (in thousands)?
A. $100
B. $510.5
C. $529.5
D. $0
6. What is the depreciation tax shield of the last year of the project (in thousands)?
A. $136
B. $78.3
C. $39.2
D. $130.6
7. What is the NPV of the project (in thousands)? After-tax cost of capital is 12%.
A. $1,403.3
B. $1577.7
C. -$560.7
D. $711.92
8. What is the IRR (Internal Rate of Return) of the project?
9. Even with the calculated NPV from Question 12, as a manager, you might still make the final investment decision opposite to what suggested by the NPV.
A. True.
B. False.
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