Question
4) Gallatin, Inc., has assembled the estimates shown below relating to a proposed new product. These estimates are based on a 5-year project life, at
4) Gallatin, Inc., has assembled the estimates shown below relating to a proposed new product. These estimates are based on a 5-year project life, at the end of which the new equipment would be sold, working capital would revert to other uses in the company, and the product would be discontinued. Gallatin uses a discount rate of 10%. (Ignore income taxes.)
Annual cash sales | $ | 450,000 |
Annual out-of-pocket cash expenses | $ | 340,000 |
Annual depreciation on new equipment | $ | 50,000 |
Initial cost of new equipment | $ | 380,000 |
Salvage value of equipment in 5 years | $ | 50,000 |
Working capital requirement | $ | 60,000 |
Refer to Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.
Required:
Compute the net present value of the new product. (3 points)
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