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please answer regarding to the following pictures! 1. Your R&D department has come up with an innovative product. Your firm had spent $2m as R&D
please answer regarding to the following pictures!
1. Your R\&D department has come up with an innovative product. Your firm had spent $2m as R\&D expenses for this project. You are now wondering whether this product introduction will increase firm value? Investment of $6.0m is required immediately and another $4.0m is required at the end of year 1 . The factory can start manufacturing only after this second investment is made. Depreciation schedule: straight-line, all assets have a life of 5 years, no salvage value. You expect to sell 1m units in the first year of production, 1.5m units in the next four years, then the project ends. You plan to sell the factory when project ends and you expect it to fetch $1m. Selling price is expected to be $10 /unit in the first year and is expected to increase at 5% per year. Cost of goods sold is $6/ unit in the first year of production and is expected to increase at 4% a year. Assume the required additional net working capital to be $1.0m in the first year of project. Afterwards, it will increase by $1.0m each year. In the end, the firm will be able to liquidate its entire NWC without loss in value. Assume corporate income tax rate to be 35% and capital gains tax rate of 20%. This project requires a nominal discount rate of 10%. What is NPV of this project Step by Step Solution
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