Your company, Printers Inc., is considering investing in a new plant to manufacture a new generation of
Question:
Your company, Printers Inc., is considering investing in a new plant to manufacture a new generation of 3D printers developed by the firm’s research and development (R&D) department. A consulting company was hired to do a preliminary study of the potential market for the new product. The consulting service costs $30,000. The company expects the project to operate for four years. The after-tax cost of capital that Printers Inc. uses for capital budgeting is 7%. Comments on the analysis of the project proposal is summarized as below.
Equipment:
─ The equipment needed to produce the new products will cost $4.8 million, which includes the construction costs and the costs of machinery and installation. For tax purposes, the equipment can be depreciated annually at a rate of $1.2 million per year. The resale value of the equipment is estimated at $0.4 million if it is sold at the end of the project’s fourth year.
─ If Printers Inc. decides to produce the new generation of printers, it will use a building it already owns that is unoccupied. Recently, the company received an offer to lease out the space for $20,000 per year.
Sales: ─ The company will sell 20,000 printers for $200 each in Year 1, and expects that the revenue will grow annually by 3% thereafter.
Costs: ─ The operating costs (direct and indirect) are expected to be 60% of the sales.
Working capital: ─ The working capital required will be 20% of the sales.
a) Estimate the project’s initial, intermediate, and terminal cash flows.
b) Calculate the NPV, IRR, and Payback period of the project.
c) Should Printers, Inc. accept the project? Motivate your recommendation.
Expert Answer:
a Estimate the projects cash flows 1 Initial Cash Flow Year 0 Equipment cost 48 million Consulting service cost 30000 2 Intermediate Cash Flows Years ... View the full answer
