You must analyze a potential new product--a caulking compound that Cory Materials' R&D people developed for use in the
residential construction industry. Cory's marketing manager thinks they can sell 115,000 tubes per year at a price of $3.25
each for 3 years, after which the product will be obsolete. The required equipment would cost $150,000, plus another
$25,000 for shipping and installation. Current assets (receivables and inventories) would increase by $35,000, while
current liabilities (accounts payable and accruals) would rise by $15,000. Variable costs would be 60% of sales revenues,
fixed costs (exclusive of depreciation) would be $70,000 per year, and fixed assets would be depreciated under MACRS with
a 3-year life. (Refer to Appendix 12A for MACRS depreciation rates.) When production ceases after 3 years, the equipment
should have a market value of $15,000. Cory's tax rate is 40%, and it uses a 10% WACC for average-risk projects.
a. Find the required Year 0 investment and the project's annual cash flows. Then calculate the project's
NPV, IRR, MIRR, and payback. Assume at this point that the project is of average risk.
Part 1. Key Input Data
Equipment cost plus installation			$175,000		Market value of equipment in 2014			$15,000
Increase in current assets			$35,000		Tax rate			40%
Increase in payables and accruals			$15,000		WACC			10%
Unit sales			115,000
Sales price per unit			$3.25
Variable cost per unit			60%
Variable cost per unit (in dollars)			$1.95
Fixed costs			$70,000
Part 2. Depreciation and Amortization Schedule				Years
Year			Initial Cost	1	2	3
Equipment Depreciation Rate
Equipment Depreciation (Dollars)							Accumulated depreciation (sum of years 1, 2, and 3) = $162,750
Ending Book Value: Cost