General Wireless has just completed market research on a new smartphone. This new phone is lighter and smaller, though more feature rich, than its existing product. New product sales are estimated at 1,000,000 units per year with a contribution margin of $40. However, if General Wireless introduces its new product, sales of its existing smartphone will fall from 600,000 to 250,000 units per year. Its existing product has a contribution margin of $30.

The market research on the new phone was $350,000. General Wireless will retool one of its existing manufacturing facilities to produce the new model. The one-time retooling cost is $3,700,000. There will also be $80,000 in retraining costs incurred for workers who lost their jobs manufacturing the existing product. The new facility is expected to increase fixed cash costs of $150,000 per year. Research and development on the new phone took 2 years at a cost of $1,900,000. The R&D group also paid an external company for use of their advanced testing facilities at a further cost of $100,000.

General Wireless has also spent $90,000 in the design of a new corporate headquarters. Building the headquarters will cost $4,000,000.

For capital budgeting purposes, calculate the project's:

Initial cost.

Annual cash flows before tax.

11-6. Marine Technologies has identified a project that will lower annual operating costs by $10,000 per year for 5 years. The equipment costs $30,000, installation and training is $5,000, and there is an initial investment in net operating working capital of $6,000. There is no expected salvage value in 5 years. Marine Technologies operates at break-even so it pays no taxes. If the company's cost of capital is 10%, what is the project's NPV?

11-8 Assume the following information for Project X:

Initial investment: $50,000

Annual after-tax cash flows: $8,000

Salvage value: $0

If the project's internal rate of return is 12.5%, what must be the life of the project (to the nearest year)?

11-16. Taylor Corporation currently uses an injection-moulding machine that was purchased 2 years ago. The CCA rate on this machine is 30%. Currently, it can be sold for $2,500. If this old machine is not replaced, it is not expected to have any value at the end of its useful life, estimated to be 6 years from now.

Taylor is offered a replacement machine that has a cost of $12,000, an estimated useful life of 6 years, and an estimated salvage value of $1,200. The CCA rate on this machine is also 30%. The replacement machine would permit an output expansion, so sales would rise by $1,400 per year; also, the new machine's much greater efficiency would reduce operating expenses by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would simultaneously increase by $1,000. Taylor's tax rate is 30% and its WACC is 12%. Should the company replace the old machine?