Question
Tetious Dimension is introducing a new product and has an expected change in net operating income of $475,000. To examine the possibility of introducing this
Tetious Dimension is introducing a new product and has an expected change in net operating income of $475,000. To examine the possibility of introducing this new product, the company has performed a marketing research in the last year that has had a cost of $80,000. Tetious Dimensions. has a 34% marginal tax rate. Should the company decide to invest in this project, there will be a $100,000 depreciation expense per year. In addition, this project will cause the following changes:
| Without the Project | With the Project |
Accounts Receivable | $45,000 | $63,000 |
Inventory | 65,000 | 80,000 |
Accounts Payable | 70,000 | 94,000 |
a) What is the projects free cash flow?
b) Do we have enough information to calculate NPV? Why or why not? If yes, calculate.
I got the answer $404,500 for the free cash flow portion but I am not sure if I am supposed to factor the market research into this (I haven't yet) and I also don't know how to answer part b.
Thanks for your help!
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