Advantech, Inc is considering to start selling a new product. The company spent $200,000 to develop the product over the last five years. The estimated life of the product is 3 years and the estimated operating revenues and costs are the following: 1 3 $600,000 $700,00 $300,000 $350,000 $250,000 Sales $500,000 Operating costs To produce this product the company will have to acquire a new equipment that costs $400,000. The equipment has a life of 3 years and will be depreciated straight line to zero (meaning that the book value in 3 year is 0). The company believes that the equipment

Advantech, Inc is considering to start selling a new product. The company spent $200,000 to develop the product over the last five years. The estimated life of the product is 3 years and the estimated operating revenues and costs are the following: 1 3 $600,000 $700,00 $300,000 $350,000 $250,000 Sales $500,000 Operating costs To produce this product the company will have to acquire a new equipment that costs $400,000. The equipment has a life of 3 years and will be depreciated straight line to zero (meaning that the book value in 3 year is 0). The company believes that the equipment

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Advantech, Inc is considering to start selling a new product. The company spent
$200,000 to develop the product over the last five years. The estimated life of the product
is 3 years and the estimated operating revenues and costs are the following:
1
3
$600,000
$700,00
$300,000 $350,000 $250,000
Sales
$500,000
Operating costs
To produce this product the company will have to acquire a new equipment that costs
$400,000. The equipment has a life of 3 years and will be depreciated straight line to zero
(meaning that the book value in 3 year is 0). The company believes that the equipment
1
can be sold in 3 year for $80,000. The new product requires networking capital at a level
of about 10% of sales. The NWC should be built on the prior year. For example, at time 0
the company needs to have $60,000 in NWC for this project. The tax rate is 21% and the
appropriate discount rate is 10%.
a. Estimate the cash-flows associated with the project.
b. Compute the NPV for the project.
c. Should Advantech start with the production of the new product? Explain why.

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