After an upfront research and development cost of €1,500,000, Gillette is proposing a new three-blade razor (MACH-3) that they hope will be a success in the competitive razor market. The project requires an initial investment of €75,000,000 to build new factories and to buy equipment. This investment will be depreciated straight-line over five years to a value of zero. Some of the equipment will be housed in an old building that Gillette owns. This building could be rented for €200,000 a year to another business if Gillette MACH-3 was not being made there. The factories also require an annual overhead cost of €2,800,000. 

Production costs are estimated at €110 per razor and the razors will be sold for €260 each. Sales are expected to be 100,000 units in the first year and to rise by 20% a year in each of the subsequent four years (i.e. years 2, 3, 4, 5). Due to the introduction of new three-blade razor the sales of the old two-blade razor is expected to decline 25% in the first year and then it is expected to remain constant. Gillette was selling annual 100,000 units of two-blade razor with a price of €100 per blade and cost of €60 per blade, before the introduction of MACH-3. 

The firm will need working capital for the project. It is estimated that the project needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 15% of its annual CGS in accounts payable. The firm pays 40% tax and the required return on the project is 10%. 

Calculate annual net working capital requirements for Gillette MACH-3 and also calculate the annual change in net working capital requirements.

 

Calculate cannibalization impact of Gillette two-blade on sales and cost of goods sold of Gillette MACH-3

 

 

Calculate free cash flows for Gillette MACH-3 project while showing calculations of the following heads: Sales (before and after the cannibalization impact), CGS (before and after the cannibalization impact), Gross profit (before and after the cannibalization impact), opportunity cost (if any), depreciation, EBIT, net income, capital expenditure, and net working capital.

 

Calculate NPV of the project

 

 

Calculate IRR of the project

Answer rating: 100% (QA)

To calculate the annual net working capital requirements and the annual change in net working capital requirements for the Gillette MACH3 project we need to consider the given information about the co... View the full answer