A company is considering launching a new product. You have ordered a feasibility study at a cost of $300,000 to investigate the consequences of the investment. The study yielded the following information. The expected sales for the next four years are as follows:

Year	units sold
1	63,000
2	70.000
3	78,000
4	60.000

The selling price of the new product is estimated to be $200 per unit. The logistics department forecasts that net working capital (NWC) requirements will account for 20% of current year sales and that NWC will be fully recovered in year 5. Variable costs per unit are estimated at $140 and There are fixed annual costs of $600,000 every year. Due to marketing synergies, the new product is expected to increase sales of existing products by $150,000 per year for the next 4 years.

This project requires an initial investment (machine) of $8 million that can be depreciated on a straight-line basis over 8 years to zero book value. At the end of the project in year 4, the machine can be sold for 40% of the purchase price. Taxable income and capital gains are taxed at a flat rate of 35%, and the rate of return required by investors is 16%. Calculate the NPV of the project.

Answer rating: 100% (QA)

To calculate the Net Present Value NPV of the project we need to calculate the cash flows for each y... View the full answer