Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Problem 5 (17 points) The CEO of Enterprise Bourgeois wants to launch a new product requiring the purchase of a particularly complex machine. He gathered
Problem 5 (17 points) The CEO of Enterprise Bourgeois wants to launch a new product requiring the purchase of a particularly complex machine. He gathered the following data in relation to this project: 1) The machine could be purchased and installed immediately so that it could be in full working order within a month. Its cost is $ 200,000, an amount that must have been paid when it is put into operation. It will have a useful life of three years and a scrap or resale value of $ 10,000 at the end of that period. 2) The additional operational costs for this machine will be $ 25,000 per year. 3) The net cash inflows (i.e. revenues minus expenses, excluding machine operating costs) will be $ 80,000 for the first year, $ 125,000 for the second year and $ 130,000 for the third year. The duration of the project is therefore three years. 4) If the manager buys this machine and launches the new product, another 10 year old machine that costs $ 250,000 and has a depreciation charge of $ 25,000 each year will go into the trash. The book value of this machine is zero. 5) The cost of capital is 6%. The CEO predicts that the launch of this new product will revive the business that has not been so successful in recent years. He hopes this new product will improve the company's image with current customers and increase sales of its other products in future years. For the evaluation of its long-term investment projects, the company uses the criterion of the net present value of cash flows (NPV), assuming that the cash flows (cash inflows) of a year have held at the end of the year. Work to do: 1) Should the CEO of Entreprise Bourgeois launch this new product? (For this question, present the relevant data table and your schedule or quantitative table only)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started