Question
A company expected new Shampoo sales of 50,000 units per year at a price of $4 per shampoo. The variable cost per shampoo is $2.50
A company expected new Shampoo sales of 50,000 units per year at a price of $4 per shampoo. The variable cost per shampoo is $2.50 and fixed cost is $12,000 per year.
This new product has a total value of life of three years. The company will make an initial investment of $90,000 to purchase a manufacturing equipment.
Assume this equipment will 100% depreciated within three years through straight line depreciation method/Sum of Digits Method/Double declining method. Finally, the project will require an initial $20,000 investment in net working capital, and the tax rate is 34 percent.
In addition, 10 Coupon Bonds, 8 percent coupon bonds outstanding, $1,000 par value,04 years to maturity, selling for 103 percent of par; the bonds making annual payments.
While the remaining $80,000 is raised through 10,000 common shares. The company has Beta value of 0.5 with D/E ratio of 1.2, Index returns is 4% and T-bills rate is 3%. The Free Cash flow expected growth rate is 2% in fourth year and thereafter forever
How different types of depreciation methods affect the project NPV & IRR
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