Parker Products manufactures a variety of household products. The company is considering introducing a new detergent. The companys CFO has collected the following information about the proposed product.

* The project has anticipated life of 4 years.

* The company will purchase a new machine to produce the detergent. The machine has a depreciable basis (t = 0) of $2 million. The machine will be depreciate on a straight- line basis over the 4 years. After four years, its salvage value will equal zero.

* The project would affect the companys net operating working capital. Initially, (t = 0) inventory will increase by $140,000 and accounts payable will increase by $40,000. (Hint: Remember for NOWC, operating liabilities are subtracted from assets). At t = 4, the net operating working capital will be recovered after the project is completed. Assume that NOWC stays constant between years and 1 and 3. (Hint: What is the cash flow impact if NOWC doesnt change?).

* The detergent is expected to generate sales revenue of $1 million the first year, (t = 1), $2 million the second year (t = 2), $2 million the third year (t = 3), and $1 million the final year (t = 4). Each year the operating costs (not including depreciation) are expected to equal 50% of sales revenue.

* the projects WACC is 12%; the companys tax rate is 40%.

Set up a table as in class and determine the projects annual cash flows. Label the relevant rows and columns. Copying and pasting from your work in Excel is fine; be sure the columns and rows line up for easy reading.

The NPV of the above project is ...

		-$45,081
		-$55,081
		-$65,081
		-$75,081

True or False: You would accept this project.

True

False