A manufacturing company is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 45% of sales. Indirect incremental costs are estimated at $95,000 a year. The project requires a new plant that will cost a total of $1,500,000, which will be a depreciated straight line over the next 5 years. The new line will also require an additional net investment in inventory and receivables in the amount of $200,000.
- Using the information in theassignment description:
- Prepare a statement showing theincremental cash flows for this project over an 8-year period.
- Calculate the payback period(P/B) and the net present value (NPV) for the project.
- Answer the following questionsbased on your P/B and NPV calculations:
- Do you think the project shouldbe accepted? Why?
- Assume thecompany has a P/B (payback) policy of not accepting projects with lifeof over 3 years.
- If the project required additionalinvestment in land and building, how would this affect your decision?Explain.
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