North Bay Village Safety Products has an opportunity to manufacture replacement air bags for Takata Corp on a long-term contract for warranty work. The following financial information is available for this project:

YR	Sales	Retooling expense
1	300,000
2	650,000
3	2,000,000	100,000
4	2,100,000	50,000
5	2,300,000	50,000
6	2,200,000	50,000
7	2,150,000	50,000
8	2,025,000	10,000
9	2,000,000	10,000
10	400,000
	16,125,000

Additional information
Equipment will cost $2,575,000 and will have a salvage value of $75,000.
The project will require $100,000 in working capital.
The company depreciates equipment using the straight-line method.
Cost of goods sold will be 25% of sales.
Annual general & admin expense will be $740,000 and includes depreciation expense.
The cost of capital is 16%.

REQUIRED:

4.1. What is the Net Present Value of this project?

4.2. Should North Bay accept this project and make the investment? Why or why not?

4.3. What is the Internal Rate of Return of this project?

4.4. North Bay is considering ending the project after nine years. What is the

Net Present Value of the project with a nine year duration instead of ten years?

4.5. What is the difference in cash flow in years 1 through 8 if the project is cut back to

nine years? Why is it that way?

North Bay Village Safety Products has an opportunity to manufacture replacement air bags for Takata Corp on a long-term contract for warranty work. The following financial information is available for this project:

YR	Sales	Retooling expense
1	300,000
2	650,000
3	2,000,000	100,000
4	2,100,000	50,000
5	2,300,000	50,000
6	2,200,000	50,000
7	2,150,000	50,000
8	2,025,000	10,000
9	2,000,000	10,000
10	400,000
	16,125,000

Additional information
Equipment will cost $2,575,000 and will have a salvage value of $75,000.
The project will require $100,000 in working capital.
The company depreciates equipment using the straight-line method.
Cost of goods sold will be 25% of sales.
Annual general & admin expense will be $740,000 and includes depreciation expense.
The cost of capital is 16%.

REQUIRED:

4.1. What is the Net Present Value of this project?

4.2. Should North Bay accept this project and make the investment? Why or why not?

4.3. What is the Internal Rate of Return of this project?

4.4. North Bay is considering ending the project after nine years. What is the

Net Present Value of the project with a nine year duration instead of ten years?

4.5. What is the difference in cash flow in years 1 through 8 if the project is cut back to

nine years? Why is it that way?

North Bay Village Safety Products has an opportunity to manufacture replacement air bags for Takata Corp on a long-term contract for warranty work. The following financial information is available for this project:

YR	Sales	Retooling expense
1	300,000
2	650,000
3	2,000,000	100,000
4	2,100,000	50,000
5	2,300,000	50,000
6	2,200,000	50,000
7	2,150,000	50,000
8	2,025,000	10,000
9	2,000,000	10,000
10	400,000
	16,125,000

Additional information
Equipment will cost $2,575,000 and will have a salvage value of $75,000.
The project will require $100,000 in working capital.
The company depreciates equipment using the straight-line method.
Cost of goods sold will be 25% of sales.
Annual general & admin expense will be $740,000 and includes depreciation expense.
The cost of capital is 16%.

REQUIRED:

4.1. What is the Net Present Value of this project?

4.2. Should North Bay accept this project and make the investment? Why or why not?

4.3. What is the Internal Rate of Return of this project?

4.4. North Bay is considering ending the project after nine years. What is the

Net Present Value of the project with a nine year duration instead of ten years?

4.5. What is the difference in cash flow in years 1 through 8 if the project is cut back to

nine years? Why is it that way?

North Bay Village Safety Products has an opportunity to manufacture replacement air bags for Takata Corp on a long-term contract for warranty work. The following financial information is available for this project:

YR	Sales	Retooling expense
1	300,000
2	650,000
3	2,000,000	100,000
4	2,100,000	50,000
5	2,300,000	50,000
6	2,200,000	50,000
7	2,150,000	50,000
8	2,025,000	10,000
9	2,000,000	10,000
10	400,000
	16,125,000

Additional information
Equipment will cost $2,575,000 and will have a salvage value of $75,000.
The project will require $100,000 in working capital.
The company depreciates equipment using the straight-line method.
Cost of goods sold will be 25% of sales.
Annual general & admin expense will be $740,000 and includes depreciation expense.
The cost of capital is 16%.

REQUIRED:

4.1. What is the Net Present Value of this project?

4.2. Should North Bay accept this project and make the investment? Why or why not?

4.3. What is the Internal Rate of Return of this project?

4.4. North Bay is considering ending the project after nine years. What is the

Net Present Value of the project with a nine year duration instead of ten years?

4.5. What is the difference in cash flow in years 1 through 8 if the project is cut back to

nine years? Why is it that way?