A company is intending to invest in a capital budgeting project to manufacture a medical testing device
Question:
A company is intending to invest in a capital budgeting project to manufacture a medical testing device and has projected the following sales:
Year 1 Year 2 Year 3 Year 4 Year 5
50,000 66,400 81,200 68,500 54,500
The installed cost of the new assets will be $18,500,000 which will be depreciated using the 7-year MACRS schedule. The assets will have a salvage value of $3,700,000. Initial NWC requirements are $1,500,000 and additional working capital needs are estimated to be 15% of the projected sales increases for the following year. Total fixed costs are $2,000,000 per year. The medical device has a selling price of $300 per unit and variable production costs are $175. The firm has a marginal tax rate of 35% and a required rate of return of 18%. Analyze this project and give your recommendation as to whether they should invest in it or abandon it.
Questions:
Submit the 5 year cash flows for this project - do not forget to start off with the initial NWC requirements at time zero and include the changes year on year - until the final reversal in the terminal year.
Include the ATSV in the terminal year.
Do you recommend the firm invest in this project? Why or why not?
Foundations of Finance The Logic and Practice of Financial Management
ISBN: 978-0132994873
8th edition
Authors: Arthur J. Keown, John D. Martin, J. William Petty