Under a special arrangement, Swineyard Company has an opportunity to market a new product for a five-year period. The product will be purchased from the manufacturer, with Swineyard Company responsible for all costs of promotion and distribution. The licensing arrangement could be renewed at the end of the five-year period. After careful study, Swineyard Company has estimated the following costs and revenues for the new product:

Cost of equipment needed	$60,000
Working capital needed	100,000
Overhaul of equipment in 4 years	5,000
Salvage value of the equipment in 5 years	10,000
Annual Revenue and costs:
Sales Revenue	200,000
Cost of Goods Sold	125,000
Operating costs	35,000

At the end of the five year period, the working capital would be released for investment elsewhere if Swineyard decides not to renew the licensing arrangement. Swineyard uses a 14% discount rate to compare projects against. A TVM table with 14% discount rate is attached.

Your job: Compute the Net Present Value of the project and decide whether Swineyard should do it or not.

Additional Notes

Note when the overhaul occurs. This is a one-time cash outflow.

The Working Capital is needed at the beginning of the project. At the end of the project (Year 5) they no longer need it so it becomes a cash inflow.

Answer rating: 100% (QA)

Calculation of Net Present Value Amount Year Particulars 0 Equipment Cost oInitial W Cap 4 Overhaul ... View the full answer