We are considering the introduction of new product. Currently we are in the 27% tax bracket with a 10% discount rate. The project is expected to last five years and then, it will be terminated. The following information describes the new project: Cost of new plant and equipment RM 8,900,000 Shipping and installation costs RM 400,000 Unit Sales: Year Units Sold 1 70,000 2 120,000 3 140,000 4 80,000 5 60,000 Sales price per unit: RM300/unit in Years 1-4 and RM260/unit in Year 5 Variable cost per unit: RM180/unit Annual fixed costs: RM300,000 per year Working capital requirements: There will be an initial working capital requirement of RM100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital will increase during Years 1 through 3, then decrease in Year 4. Finally, all working capital is liquidated at the termination of the project at the end of Year 5. Depreciation Method: Straight line over five years assuming the plant and equipment have no salvage value after five years. What is the project’s initial outlay?
We are considering the introduction of new product. Currently we are in the 27% tax bracket with a 10% discount rate. The project is expected to last five years and then, it will be terminated. The following information describes the new project:
Cost of new plant and equipment RM 8,900,000
Shipping and installation costs RM 400,000
Unit Sales:
|
Year |
Units Sold |
|
1 |
70,000 |
|
2 |
120,000 |
|
3 |
140,000 |
|
4 |
80,000 |
|
5 |
60,000 |
Sales price per unit: RM300/unit in Years 1-4 and RM260/unit in Year 5
Variable cost per unit: RM180/unit
Annual fixed costs: RM300,000 per year
Working capital requirements:
There will be an initial working capital requirement of RM100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital will increase during Years 1 through 3, then decrease in Year 4. Finally, all working capital is liquidated at the termination of the project at the end of Year 5.
Straight line over five years assuming the plant and equipment have no salvage value after five years.
What is the project’s initial outlay?
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