Example $2$: The Baldwin Company

Costs of test marketing $($already spent$)$: $$250,000$

Current market value of proposed factory site $($which we own$)$: $$150,000$

The proposed factory site is expected to be worth $$150,000$ at the end of the project

Cost of bowling ball machine: $$100,000($depreciated according to MACRS $5-$year$)$

Bowling ball machine's salvage value: $$30,000$

Increase in net working capital in year $0$: $$10,000$

Net working capital at end of each year is $10\%$ of sales

Production $($in units$)$ by year during $5-$year life of the machine: $5,000,8,000,12,000,10,000,6,000$

Price during first year is $$20$; price increases $2\%$ per year thereafter.

a Production costs during first year are $$10$ per unit and increase $10\%$ per year thereafter.

a Annual inflation rate: $5\%$

Discount rate: $10\%$

Tax rate is $34\%$

to calculating its NPV result, following the method introduced in Chapter $6.$ The proposed project is Example $2($The Baldwin Company$)$ in Chapter $6-$ Cash Flow $($part $1).$ The goal is to have a systematic approach to forecast cash flows and also provide users the flexibility to modify key inputs$*$ to quickly get the NPV results under different scenarios. A good reference is the Excel Template provided in the Canvas course.

$*$For grading purposes, these key inputs include:

Units sold for each year of the project

Price per unit for Year $1$

Price increase percentage per year $($assume the same for all years$)$

Unit production cost for Year $1$

Unit production cost increase percentage per year $($assume the same for all years$)$

NWC to start project

NWC for subsequent years as a percentage of Sales $($assume the same for all years$)$

Cost of warehouse

Cost of machine

Depreciation rate for each year of the project

Salvage value of machine $($pre$-$tax$)$

Tax rate $($assume the same for all years$)$

Discount rate $($assume the same for all years$)$