Question
you have just been hired by Company X* in their strategic management accounting division. Your first assignment is to determine the free cash flows and
you have just been hired by Company X* in their strategic management accounting division. Your first assignment is to determine the free cash flows and NPV of launching new product line (Product Alpha) in Kuwait. Development of Product Alpha will initially require an initial capital expenditure equal to 2% of Company Xs net Property, Plant and Equipment (PPE) at the end of the fiscal year 2021. The Product Alpha is expected to have a life of five years before competitors enter the market and the company has to re-strategize its operations. First-year revenues for Product Alpha are expected to be 3% of Company Xs total revenue for fiscal year 2021. The revenues are expected to grow at 15% for the second year, then 10% for the third year and 5% annually for the final two years of Product Alpha. Your job is to determine the rest of the cash flows associated with Product Alpha. Your boss has indicated that the operating costs and net working capital requirements are similar to the rest of the company and that depreciation is straight line for capital investments. Since your boss hasn't been much help (welcome to the real world!), here are some tips to guide your analysis. Using a 20% discount rate, use excel to calculate NPV and IRR for the project and make your investment recommendation.
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