Question
The company is considering manufacturing designer desk lamps and you must estimate the cash flows from the project and apply capital budgeting tools to determine
The company is considering manufacturing designer desk lamps and you must estimate the cash flows from the project and apply capital budgeting tools to determine if the project is a value-creating proposition. You are required to build an Excel spreadsheet to analyze the project.
Sunlight Manufacturing, Inc. (SMI) has been successfully producing and selling electrical appliances for the past 20 years and is considering an extension of its existing product line. The companys VP of Marketing has proposed that SMI enter the relatively high margin, high-quality designer desk lamp market. A consulting company was hired to do a preliminary study of the potential market for this type of product. The consulting company charged SMI $25,000 for the study and was paid a month later. Its report indicates that SMI can sell as many as 45,000 lamps the first year of the project, 40,000 the second year, 30,000 the third year, 20,000 the fourth year, and 10,000 the fifth year. The designer desk lamps can be sold for $40 each the first year and the price will increase by 3 percent each year to account for expected inflation. The project will be terminated after five years.
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