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    Capital Budgeting

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    Superior Manufacturing 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 depreciated straight line over the next five 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 and land for the project. The firm's marginal tax rate is 35%, and its cost of capital is 10%. Based on this information you are to complete the following tasks.

    1. Prepare a statement showing the incremental cash flows for this project over an 8-year period.
    2. Calculate the Payback Period (P/B) and the NPV for the project.

    © BrainMass Inc. brainmass.com June 3, 2020, 8:18 pm ad1c9bdddf
    https://brainmass.com/business/cash-budgeting/capital-budgeting-132252

    Solution Summary

    The solution explains the cash flow calculation and the calculation of NPV and payback period

    $2.19

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