d The company's is considering introducing a new detergent. collected the following information about the proposed product. You may or may not need to use all of this information, use only information.) ● The project has an anticipated economic life of 4 years. O The company will have to purchase a new machine to pro detergent. The machine has an up-front cost (t = 0) of $2 The machine will be depreciated on a straight-line basis ove.
d The company's is considering introducing a new detergent. collected the following information about the proposed product. You may or may not need to use all of this information, use only information.) ● The project has an anticipated economic life of 4 years. O The company will have to purchase a new machine to pro detergent. The machine has an up-front cost (t = 0) of $2 The machine will be depreciated on a straight-line basis ove.
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
Problem 1PS
Related questions
Question
M1
Transcribed Image Text:The company
Parker Products manufactures a variety of household products.
is considering introducing a new detergent. The company's CFO has
collected the following information about the proposed product. (Note:
You may or may not need to use all of this information, use only relevant
information.)
The project has an anticipated economic life of 4 years.
The company will have to purchase a new machine to produce the
detergent. The machine has an up-front cost (t 0) of $2 million.
The machine will be depreciated on a straight-line basis over 4 years
(that is, the company's depreciation expense will be $500,000 in each
of the first four years (t 1, 2, 3, and 4).
The company
anticipates that the machine will last for four years, and that after
four years, its salvage value will equal zero.
If the company goes ahead with the proposed product, it will have an
effect on the company's net operating working capital. At the
outset, t
=
=
accounts
=
At t
0, inventory will increase by $140,000 and
payable will increase by $40,000.
4, the net operating
working capital will be recovered after the project is completed.
The detergent is expected to generate sales revenue of $1 million the
first year (t 1), $2 million the second year (t 2), $2 million
the third year (t = 3), and $1 million the final year (t 4). Each
year the operating costs (not including depreciation) are expected to
equal 50 percent of sales revenue.
The company's interest expense each year will be $100,000.
The new detergent is expected to reduce the after-tax cash flows of the
company's existing products by $250,000 a year (t = 1, 2, 3, and 4).
The company's overall WACC is 10 percent. However, the proposed
project is riskier than the average project for Parker; the project's
WACC is estimated to be 12 percent.
The company's tax rate is 40 percent.
What is the net present value of the proposed project?
=
=
=
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education