Reference no: EM132633106

Under a special licensing arrangement, Swinyard Corporation has an opportunity to market a new product for a 5 year period. The product would be purchased from the manufacturer, with Swinyard responsible for promotion and distribution costs. The licensing arrangement could be renewed at the end of the five-year period.

After careful study, Swinyard estimated the following costs and revenues for the new product:

Cost of equipment needed                      60,000

Working capital needed                         100,000

Overhaul of the equipment in 4 years        5,000

Salvage value of the equipment in 5 years 10,000

Annual revenues and costs:

Sales revenues                                                                                      200,000

Cost of goods sold                                                                                 125,000

Out of pocket operating costs (for Salaries, advertising & other direct costs)   35,000

Problem 1: At the end of the 5 year period, if Swinyard decides not to renew the licensing arrangement the working capital would be released for investment elsewhere. Swinyard uses a 14% discount rate. Would you recommend that the new product be introduced?