Question
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of four years. The cost of the machine
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of four years. The cost of the machine is $40,000 and the machine will be depreciated straight line over its four-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2,000 canes in year 1. Sales are estimated to grow by 10% per year each year through year four. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual cost of sales in accounts payable. NWC requirements will be recognized at the beginning of each year while all other sales and costs will be recognized at the end of the each year. Therefore NWC will be required immediately and can be recovered at the end of year four. The managers expect to spend $10,000 per year for marketing and advertisement expenses. The firm is in the 20% tax bracket, and has a cost of capital of 10%. What is the NPV of the Sisyphean Corporation's project? Should you accept this project?
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