Capital Budgeting Problem
Kraemer Company is launching a new product. The following information relates to the launch:
1) 4 year project life					8) Sales for first year			$200,000
2) New equipment cost			$(200,000)		9) Sales increase per year			5%
3) Equipment ship & install cost			$(35,000)		10) Operating cost:			$(120,000)
4) Related start up cost			$(5,000)		as a percent of sales			-60%
5) Inventory increase			$25,000		11) Depreciation expense - SL			$(60,000)
6) Accounts Payable increase			$5,000		12) Tax rate			-40%
7) Equip. salvage value after tax			$15,000		13) WACC			-10%
Calculate NPV, IRR and Pay-back??
Cash Flow Framework:
Year			0	1	2	3	4
Investments:
Total
Operations:
Total
Terminal:
1) Change in WC OR Realease of WC
2) Salvage Value(after tax)
Total Terminal Cash flows
Total Cash Flows			$ -	$ -	$ -	$ -	$ -
NPV = ? Q: How would you explain to your CEO(in business terms) what NPV means? Q: What are the advantages of using NPV versus IRR?			IRR = ?			Payback = ?