Question
A company will sell Widgets to consumers at a price of $93 per unit. The variable costto produceWidgets is $28 per unit. The company expects
A company will sell Widgets to consumers at a price of $93 per unit. The variable costto produceWidgets is $28 per unit. The company expects to sell 13,000Widgets toconsumers each year. The fixed costs incurred each year will be $120,000. There is an initial investment to produce the goods of $2,900,000 which will be depreciated straight line over the 15 year life of the investmentto a salvage value of $0. The opportunity cost of capital is 9% and the tax rate is 29%.
a) What is operating cash flow each year?
b) Using the an annual operating cash flow of $570,816.67, what is the net present value of this investment?
c) Should the company accept or reject this project?
d) What is the net present value of the project if inventories must be increased at the start of the project (year 0) by $800,000 and will be recovered at the end (year 15), given that the NPV of the projectignoring changes in net working capital is $1,701,175.33?
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