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You must analyze a potential new producta caulking compound that Cory Materials R&D people developed for use in the residential construction industry. Corys marketing manager thinks the company can sell 115,000 tubes per year at a price of $3.25 each for 3 years, after which the product will be obsolete. The required equipment would cost $150,000, plus another $25,000 for shipping and installation. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payable and accruals) would rise by $15,000. Variable cost per unit is $1.95, fixed costs (exclusive of depreciation) would be $70,000 per year, and fixed assets would be depreciated under MACRS with a 3-year life. (Refer to Appendix 12A for MACRS depreciation rates.) When production ceases after 3 years, the equipment should have a market value of $15,000. Corys tax rate is 40%, and it uses a 10% WACC for average-risk projects.

1. FindtherequiredYear0investmentandtheprojectsannualcashflows.Thencalculate the projects NPV, IRR, MIRR, and payback. Assume at this point that the project is of average risk.

2. SupposeyounowlearnthatR&Dcostsforthenewproductwere$30,000andthatthose costs were incurred and expensed for tax purposes last year. How would this affect your estimate of NPV and the other profitability measures?

3. If the new project would reduce cash flows from Corys other projects and if the new project would be housed in an empty building that Cory owns and could sell, how would those factors affect the projects NPV?

4. Are this projects cash flows likely to be positively or negatively correlated with returns on Corys other projects and with the economy, and should this matter in your analysis? Explain.