E.B. Foxx Corporation developed a new product that it believes will have broad market appeal. The companys recent cost and marketing studies revealed the following:

a. New equipment costing $360,000 would need to be acquired to produce the product. The equipment is estimated to have a six-year useful life, with no salvage value at the end of the six years.

b. Sales in units over the next six years are projected as follows:

Year

Unit Sales

1

20,000

2

40,000

3

50,000

4-6

60,000

Production and sales of the new product would require working capital of $50,000 to finance accounts receivable, inventory, and day-to-day cash needs. This working capital would be released at the end of the projects life.

c. The product would sell for $35 each; variable costs for production, administration, and sales would be $22 per unit.

d. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $225,000 per year. (Annual depreciation on the new equipment (see item a. above) is on a straight-line basis over the six-year life.)

e. To gain rapid entry into the market, the company would need to advertise heavily. The advertising program would be:

Year	Annual Advertising
1-2	$180,000
3	$150,000
4-6	$120,000

f. The companys overall tax rate is 40% and its required after-tax rate of return is 16%.

Determine the net present value of the investment.

Would you recommend that E.B. Foxx Corporation take the new product in its product line? Whyorwhynot?

Production and sales of the new product would require working capital of $50,000 to finance accounts receivable, inventory, and day-to-day cash needs. This working capital would be released at the end of the projects life.

c. The product would sell for $40 each; variable costs for production, administration, and sales would be $25 per unit.

d. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $225,000 per year. (Annual depreciation on the new equipment (see item a. above) is on a straight-line basis over the six-year life.)

e. To gain rapid entry into the market, the company would need to advertise heavily. The advertising program would be:

Year	Annual Advertising
1-2	$180,000
3	$150,000
4-6	$120,000

f. The companys overall tax rate is 45% and its required after-tax rate of return is 18%.

Determine the net present value of the investment.

Would you recommend that E.B. Foxx Corporation take the new product in its product line? Whyorwhynot?

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