Your company is considering the development of a new product. In evaluating the proposed project, your company has collected the following information: The company estimates that the project will last for five years. The company will need to purchase new machinery that has an up-front cost of $300 million. The machinery will be depreciated on a straight-line basis to zero over five years. At the end of the project, the machinery can be sold at an estimated market price of $50 million. • Production of the new product will take place in a recently vacated facility that the company owns. Otherwise, the facility can be leased out to collect $5 million in rent per year for the company. The project will require a $50 million investment in inventory, and the company expects that its accounts payable will rise by $10 million as well. At the end of the project, the working capital will have been completely recovered. The company estimates that sales of the new product will be $195 million each of the next five years. The operating costs, excluding depreciation, are expected to be $100 million each year. The company tax rate is 30%, and the project's required rate of return is 10%. REQUIRED: a) Determine the Free Cash Flows to the company for developing the new project. b) What is the net present value of the project? c) Should your company proceed with the development of the new project? d) Discuss the concept of net working capital (NWC) and identify its use within a business.
Your company is considering the development of a new product. In evaluating the proposed project, your company has collected the following information: The company estimates that the project will last for five years. The company will need to purchase new machinery that has an up-front cost of $300 million. The machinery will be depreciated on a straight-line basis to zero over five years. At the end of the project, the machinery can be sold at an estimated market price of $50 million. • Production of the new product will take place in a recently vacated facility that the company owns. Otherwise, the facility can be leased out to collect $5 million in rent per year for the company. The project will require a $50 million investment in inventory, and the company expects that its accounts payable will rise by $10 million as well. At the end of the project, the working capital will have been completely recovered. The company estimates that sales of the new product will be $195 million each of the next five years. The operating costs, excluding depreciation, are expected to be $100 million each year. The company tax rate is 30%, and the project's required rate of return is 10%. REQUIRED: a) Determine the Free Cash Flows to the company for developing the new project. b) What is the net present value of the project? c) Should your company proceed with the development of the new project? d) Discuss the concept of net working capital (NWC) and identify its use within a business.
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:Your company is considering the development of a new product. In evaluating the proposed project,
your company has collected the following information:
The company estimates that the project will last for five years.
The company will need to purchase new machinery that has an up-front cost of $300 million. The
machinery will be depreciated on a straight-line basis to zero over five years. At the end of the
project, the machinery can be sold at an estimated market price of $50 million.
Production of the new product will take place in a recently vacated facility that the company owns.
Otherwise, the facility can be leased out to collect $5 million in rent per year for the company.
The project will require a $50 million investment in inventory, and the company expects that its
accounts payable will rise by $10 million as well. At the end of the project, the working capital will
have been completely recovered.
The company estimates that sales
the new product will be $195 million each of the next five
years.
The operating costs, excluding depreciation, are expected to be $100 million each year.
The company tax rate is 30%, and the project’s required rate of return is 10%.
REQUIRED:
a) Determine the Free Cash Flows to the company for developing the new project.
b) What is the net present value of the project?
c)
Should your company proceed with the development of the new project?
d) Discuss the concept of net working capital (NWC) and identify its use within a business.
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