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    Manufacturing Company: New Product Launching

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    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 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project requires a new plant that will cost a total of $1,000,000, 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.

    Assume there is no need for additional investment in building the land for the project. The firm's marginal tax rate is 35%, and its cost of capital is 10%.

    Using the information to:

    Prepare a statement showing the incremental 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 questions based on your P/B and NPV calculations:
    Do you think the project should be accepted? Why?
    Assume the company has a P/B (payback) policy of not accepting projects with life of over 3 years.
    If the project required additional investment in land and building, how would this affect your decision? Explain.

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    https://brainmass.com/business/capital-budgeting/manufacturing-company-new-product-launching-435690

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    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 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project requires a new plant that will cost a total of $1,000,000, which will be a depreciated straight line over the next 5 years. The new line will also require an additional net investment in ...

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