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ABC Ltd. is a computer manufacturer and has just received the results of a market research study to determine if the company should introduce a
ABC Ltd. is a computer manufacturer and has just received the results of a market research study to determine if the company should introduce a new product line. The expected duration of the project is 6 years. The cost for market research study is $150,000. Sue is the project manager and she has gathered the following information: Annual cash sale is $600,000 in the first two years, and starts to increase by 4% per year thereafter Expected costs is 35% of sales Other relevant data for cash flows estimation is as follow: - The market research study indicated a market exists, however, if the company proceeds with the new product line they estimate they will lose sales to the value of $150,000 in the first year, $100,000 in the second year, and $50,000 in the third year on their existing products. - Working capital is estimated as 10% of sales. All of the net working capital will be recovered at the end of the project. - The initial cost for necessary machining equipment is $1,400,000, plus the installation cost of $100,000. The equipment will be depreciated at the rate of 18% p.a. in the first four years, and 15% p.a. in year 5 and year 6. The firm expects to sell the equipment for $250,000 at the end of the project. - The company plans to set up its new operation in its own building, which was purchased last year at a cost of $3,000,000. The building site can be leased for $3,500 per month payable in arrears - Corporate tax rate is 28%, and discount rate is 12%. - Require: Using the NPV method, evaluate whether ABC Ltd should proceed with the project?
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