Question

Solve the following problem. Write all answers on the bond paper provided. Show all solutions. No solution, no cred it. Round-off to 2 decimal places. Put final answer on space provided. [15 points] You must analyze a potential new product - a compound that Cory Materials' research and development team developed for use in the residential construction industry. Cory's marketing manager thinks the company can sell 115,000 tubes per year for 3 years at a price of $3.25 each, after which the product will be obsolete. The required equipment would cost $180,000. Additional working capital of $20,000 is also needed. Variable costs would be 60% of sales revenues; fixed costs (excluding depreciation) would be $70,000 per year, and the equipment will be subject to 3- year straight line depreciation with $0 salvage value. Cory's tax rate is 40% and it uses a 10% discount rate. a. Find the required initial investment. b. Find the project's annual net cash flows from years 1 to 3 c. Find the project NPV.

Answer 1

E59 .: X fx A B C D Contrib Sale ution Fixed 57 Year units per unit costs 58 0 59 1 115,000 $ 1.30 $70,000 60 2 115,000 $ 1.30 $70,000 61 3 115,000 $ 1.30 $70,000 62 --L58/3 E F G H I J K L M N O Net Deprecia Depreciat Operating working Total cash PVIF@ tion PBT Tax@40% PAT ion cash flows capital Investment flows 10% Present value (20,000) (180,000) $-200,000 1.000 $ 200,000.00 $60,000 $ 19,500 $ 7,800 $11,700 $ 60,000 $ 71,700 $ 71,700 0.909 $ 65,181.82 $60,000 $ 19,500 $ 7,800 $11,700 $ 60,000 $ 71,700 $ 71,700 0.826 $ 59,256.20 $60,000 $ 19,500 $ 7,800 $11,700 $ 60,000 $ 71,700 20,000 - $ 91,700 0.751 $ 68,895.57 Net present value $ -6,666.42 | 64 65 a) 66 b) 67c) -$200,000 $71,700 -$6,666.42

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