Wernham-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 $86 million annually. Of this, 63% 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 $13 million annually to $44 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 $16 million annually. • The project will make use of an existing paper mill, built last year at a cost of $74 million. The mill is being depreciated using prime cost over a useful life of twenty-two years. • However, due to this decision, machinery in the mill will need to be retrofit at a cost of $60 million at t=0. The retrofit machinery has a useful life of nineteen years. • Wernham-Mifflin currently pays taxes at an overall tax rate of 35% and a marginal rate of 38%. What is the incremental cash flow from the project for the first year (at t=1)?
Wernham-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 $86 million annually. Of this, 63% 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 $13 million annually to $44 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 $16 million annually. • The project will make use of an existing paper mill, built last year at a cost of $74 million. The mill is being depreciated using prime cost over a useful life of twenty-two years. • However, due to this decision, machinery in the mill will need to be retrofit at a cost of $60 million at t=0. The retrofit machinery has a useful life of nineteen years. • Wernham-Mifflin currently pays taxes at an overall tax rate of 35% and a marginal rate of 38%. What is the incremental cash flow from the project for the first year (at t=1)?
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
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Transcribed Image Text:Wernham-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 $86 million annually. Of this, 63% 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 $13 million annually to $44 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 $16 million annually.
• The project will make use of an existing paper mill, built last year at a cost of $74 million. The mill is being depreciated using prime cost over a
useful life of twenty-two years.
• However, due to this decision, machinery in the mill will need to be retrofit at a cost of $60 million at t=0. The retrofit machinery has a useful life
of nineteen years.
• Wernham-Mifflin currently pays taxes at an overall tax rate of 35% and a marginal rate of 38%.
What is the incremental cash flow from the project for the first year (at t=1)?
O a.
$26.33 million
Ob.
$23.15 million
О.
$23.78 million
d.
$24.91 million
е.
$25.49 million
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