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Our firm is considering introducing a premium version of an existing product. Doing so will require a significant investment. Below is information on the prospective
Our firm is considering introducing a premium version of an existing product. Doing so will require a significant investment. Below is information on the prospective investment. Cost of required equipment: $12,000,000 The equipment (and project) will last for 5 years Straight line depreciation will be used. The expected salvage value after 5 years is $2,000,000 Revenues per year: $10,000,000 Expected reduction in sales of existing product per year: $1,000,000 Cost of raw materials per year: $4,000,000 Cost of additional workers per year: $1,000,000 Necessary investment in additional Net Working Capital over the life of the project: $1,000,000. Assume that this $1,000,000 investment must be made immediately. Corporate tax rate: 35% Assume that the appropriate discount rate for this project is 12%. The NPV of the cash flows that this project will generate is: $0.71 million $-1.74 million $1.62 million $-0.54 million
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