Wermham-Mifflin is considering launching a new line of septagonal-shaped paper. You have the following information: • Revenues due to the sale of the new product are expected to be $95 million annually. Of this, 77% will be by cash with the remainder sold on credit. Credit sales are expected to start being repaid after 2 years. • Total paper production costs will increase from the current level of $20 million annually to $51 million annually after the product launch. • Hyper-aggressive sales agent Dwight Schrute will be reassigned from other projects to sell the new product line. Customers of those other products will be relieved and sales will increase by $18 million annually. • The project will make use of an existing paper mill, built last year at a cost of $43 million. The mill is being depreciated using prime cost over a useful life of twenty-seven years. • However, due to this decision, machinery in the mill will need to be retrofit at a cost of $27 million at t=0. The retrofit machinery has a useful life of sixteen years. • Wernham-Mifflin currently pays taxes at an overall tax rate of 38% and a marginal rate of 44%. What is the incremental cash flow from the project for the first year (at t=1)? O a $31.77 million Ob. $29.22 million
Wermham-Mifflin is considering launching a new line of septagonal-shaped paper. You have the following information: • Revenues due to the sale of the new product are expected to be $95 million annually. Of this, 77% will be by cash with the remainder sold on credit. Credit sales are expected to start being repaid after 2 years. • Total paper production costs will increase from the current level of $20 million annually to $51 million annually after the product launch. • Hyper-aggressive sales agent Dwight Schrute will be reassigned from other projects to sell the new product line. Customers of those other products will be relieved and sales will increase by $18 million annually. • The project will make use of an existing paper mill, built last year at a cost of $43 million. The mill is being depreciated using prime cost over a useful life of twenty-seven years. • However, due to this decision, machinery in the mill will need to be retrofit at a cost of $27 million at t=0. The retrofit machinery has a useful life of sixteen years. • Wernham-Mifflin currently pays taxes at an overall tax rate of 38% and a marginal rate of 44%. What is the incremental cash flow from the project for the first year (at t=1)? O a $31.77 million Ob. $29.22 million
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Wemham-Miffin is considering launching a new line of septagonal-shaped paper. You have the following information:
• Revenues due to the sale of the new product are expected to be $95 million annually. Of this, 77% will be by cash with the remainder sold on credit. Credit sales are expected to start being repaid after 2 years.
• Total paper production costs will increase from the current level of $20 million annually to $51 million annually after the product launch.
• Hyper-aggressive sales agent Dwight Schrute will be reassigned from other projects to sell the new product line. Customers of those other products will be relieved and sales will increase by $18 million annually.
• The project will make use of an existing paper mill, built last year at a cost of $43 million. The mill is being depreciated using prime cost over a useful life of twenty-seven years.
• However, due to this decision, machinery in the mill will need to be retrofit at a cost of $27 million at t=0. The retrofit machinery has a useful life of sixteen years.
• Wernham-Mifflin currently pays taxes at an overall tax rate of 38% and a marginal rate of 44%.
What is the incremental cash flow from the project for the first year (at t= 1)?
$31.77 million
Ob.
$29.22 million
OG $33.31 million
O d. 534,43 million
O e $30.06 million
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