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: 3. $500,000 $250,000 1 $600,000 $300,000 $350,000 Sales $700,00 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.
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: 3. $500,000 $250,000 1 $600,000 $300,000 $350,000 Sales $700,00 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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text: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
$500,000
$700,00
$300,000 $350,000 $250,000
Sales
$600,000
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
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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