Electronics Unlimited was considering the introduction of a new product that was expectedYou are the CEO of Valu$-$Added Industries, Inc. $($VAI$).$ Your firm has $10,000$ shares of

common stock outstanding, and the current price of the stock is $$100$ per share. There is no

debt; thus, the "market value" balance sheet of VAI appears as follows:

VAI Market Value Balance Sheet

You then discover an opportunity to invest in a new project that produces positive net cash

flows with a present value of $$210,000.$ Your total initial costs for investing and developing

this project are only $$110,000.$ You will raise the necessary capital for this investment by

issuing new equity. All potential purchasers of your common stock will be fully aware of the

project's value and cost, and are willing to pay "fair value" for the new shares of VAI

common.

A$.$ What is the net present value of this project?

B$.$ How many shares of common stock must be issued, and at what price, to raise the required

capital?

C$.$ What is the effect, if any, of this new project on the value of the stock of the existing

shareholders?

to reach sales of $$10$ million in its first full year, and $$13$ million of sales in the second year.

Because of intense competition and rapid product obsolescence, sales of the new product

were expected to remain unchanged between the second and third years following

introduction. Thereafter, annual sales were expected to decline to two$-$thirds of peak annual

sales in the fourth year, and one$-$third of peak sales in the fifth year. No material levels of

revenues or expenses associated with the new product were expected after five years of sales.

Based on past experience, cost of sales for the new product were expected to be $60\%$ of total

annual sales revenue during each year of its life cycle. Selling, general, and administrative

expenses were expected to be $23\mathrm{.}5\%$ of total annual sales. Taxes on profits generated by the

new product would be paid at a $40\%$ rate.

To launch the new product, Electronics Unlimited would have to incur immediate cash

outlays of two types. First, it would have to invest $$500,000$ in specialized new production

equipment. This capital investment would be fully depreciated on a straight$-$line basis over

the five$-$year anticipated life cycle of the new product. It was not expected to have any

material salvage value at the end of its depreciable life. No further fixed capital expenditures

were required after the initial purchase of equipment.

Second, additional investment in net working capital to support sales would have to be

made. Electronics Unlimited generally required $27$ of net working capital to support each

dollar of sales. As a practical matter, this buildup would have to be made by the beginning of

the sales year in question $($or$,$ equivalently, by the end of the previous year$).$ As sales grew,

further investments in net working capital ahead of sales would have to be made. As sales

diminished, net working capital would be liquidated and cash recovered. At the end of the

new product's life cycle, all remaining net working capital would be liquidated and the cash

recovered.

Finally, Electronics Unlimited expected to incur tax$-$deductible introductory expenses of

$$200,000$ in the first year of the new product's sales. These costs would not be recurring over

the product's life cycle. Approximately $$1\mathrm{.}0$ million had already been spent developing and

test marketing the new product. These expenditures were also one$-$time expenses that would

not be recurring during the new product's life cycle.

A$.$ Estimate the new product's future sales, profits, and cash flows throughout its five$-$year life

cycle.