Question
A firm is evaluating a project which requires an investment of $5,600,000 in plant and equipment to produce a new multi-vitamin. The equipment will be
A firm is evaluating a project which requires an investment of $5,600,000 in plant and equipment to produce a new multi-vitamin. The equipment will be depreciated straight line to zero over the projects 4-year life. At the end of the project, the equipment will be salvaged for $750,000. The firm conducted a marketing survey which cost $100,000 to estimate demand for the multi-vitamin. The firm used the data to estimate that sales will be $3,500,000 beginning in year 1 and will increase by 5% each year of the projects life. COGS will be 25% of sales. Selling and Administrative expenses will be 6% of sales. Allocated Overhead costs will be 3% of sales. The project will require an investment in NWC estimated at 10% of sales with full recovery at the end of the project. The project is expected to increase sales of plastic containers it produces in another division by $40,000 each year. Assume the firms tax rate = 34% and wacc = 10%. Complete the Project Analysis Table below. Calculate OCFs and FCFs for each year of the project and determine the NPV.
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