Long term financial management decisions
Not what you're looking for?
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.
Prepare a statement showing the incremental cash flows for this project over an 8-year period.
Calculate the Payback Period (P/B) and the NPV for the project.
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.
If the project required additional investment in land and building, how would this affect your decision? Explain.
Purchase this Solution
Solution Summary
Long term financial management decisions are discussed for Superior Manufacturing.
Solution Preview
See the attached Excel file. Thanks
Prepare a statement showing the incremental cash flows for this project over an 8-year period.
Cash Flow Statement
Year Capital Investment Sales Revenue Direct Cost @55% of sales Indirect incremental costs Depreciation Taxable Income Tax @ 35% Net cash Flows
0 $1,000,000 $(1,000,000)
1 $950,000 $522,500 $80,000 $200,000 $147,500 $51,625 $295,875
2 $1,500,000 $825,000 $80,000 $200,000 $395,000 $138,250 $456,750
3 $1,500,000 $825,000 $80,000 $200,000 $395,000 $138,250 $456,750
4 $1,500,000 $825,000 $80,000 $200,000 $395,000 $138,250 $456,750
5 $1,500,000 $825,000 ...
Purchase this Solution
Free BrainMass Quizzes
Writing Business Plans
This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.
Basics of corporate finance
These questions will test you on your knowledge of finance.
Business Ethics Awareness Strategy
This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.
Balance Sheet
The Fundamental Classified Balance Sheet. What to know to make it easy.
IPOs
This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)