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    Finance: NPV and Payback for ABC (Superior) Manufacturing

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    The question is as follows:

    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.

    3. Based on your answer for question 2, do you think the project should be accepted? Why? Assume Superior has a P/B (payback) policy of not accepting projects with life of over three years.

    4. If the project required additional investment in land and building, how would this affect your decision? Explain.

    © BrainMass Inc. brainmass.com June 3, 2020, 6:04 pm ad1c9bdddf
    https://brainmass.com/business/net-present-value/finance-npv-and-payback-for-abc-superior-manufacturing-46748

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    This solution provides calculations and explanation in the attached Excel file.

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