Holland, Inc., has just completed development of a new cell phone. The new product is expected to produce annual revenues of $ 1,350,000. Producing the cell phone requires an investment in new equipment, costing $ 1,440,000. The cell phone has a projected life cycle of five years. After five years, the equipment can be sold for $ 180,000. Working capital is also expected to increase by $ 180,000, which Holland will recover by the end of the new product’s life cycle. Annual cash operating expenses are estimated at $ 810,000. The required rate of return is 8 percent.
1. Prepare a schedule of the projected annual cash flows.
2. Calculate the NPV using only discount factors from Exhibit 24B- 1.
3. Calculate the NPV using discount factors from both Exhibit 24B- 1 and 24B- 2.