A company is considering an investment into a new project. The company is going to sell a
Question:
A company is considering an investment into a new project. The company is going to sell a new purification system. They are planning the sales of 25 000 systems a year. The costs of market research was $100 000 and this money is already spent. The price of the product is 100$. The duration of the project is 5 years. The variable costs are estimated 40% of the sales price. The fixed costs are 325 000 per year (excl. depreciation). The investment into fixed assets is 2.5 million, is fully amortised in 5 years, and has no market value at the end of the project.
The need for investments into current assets is expected to be 15% of the sales. The firm expects that all investments into current assets can be converted into cash at the end of the project. The corporate tax rate on profits is 25%.
- Find the cash flows for the project
- Should the company invest, if the required rate of return from the project is 12%. Compute both NPV and IRR.
Business Statistics A First Course
ISBN: 978-0321979018
7th edition
Authors: David M. Levine, Kathryn A. Szabat, David F. Stephan