Purchase Solution

# Incremental cash flows

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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%.

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Using the information in the assignment description:

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.
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?

##### Solution Summary

The solution explains how to calculate the incremental cash flows and the payback period and NPV of the project

##### Solution Preview

See attached Excel file.

Prepare a statement showing the incremental cash flows for this project over an 8-year period.

Please see the attached file for cash flow calculations.

Calculate the payback period (P/B) and the net present value (NPV) for the project.

Payback period is the time taken to recover the initial investment. To calculate the payback, we calculate the cumulative cash flows and see when the cash flows become ...

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