Dunlop Inc. is a sports shoe manufacturer. Having spent $120,000 on mark research, the firm finds a new line of sports shoes promising and considers makingnew investments in it. For further evaluation, Dunlop Inc. has gathered the followinginvestment and operational data for the new sports shoe product line.

New Equipment

It costs $14,000,000.5 years economically useful life with zero salvage value.
Depreciation is calculated on a straight-line basis.

Net Working Capital (NWC) Incremental investment in NWC at the beginning of the project is $1,000,000.

New Sports Shoes Product45,000 pairs of new sports shoes will be sold every year in the next 5 years.
Each pair of new sports shoes will be sold for $700.
The variable cost is $320 per pair. Fixed cost (excluding depreciation) per year is$7,500,000.

Existing Sports shoe Product

The launch of new sports shoe products would lower the sales volume of existingsports shoe products by 13,000 pairs per year in the next 5 years. 

Sales price and variable cost for each pair of existing sports shoe product are
$500 and $280 respectively.
Required:
(a) Assume a 40% corporate tax rate, calculate the amount of initial outlay,operating cash flow per year, and terminal cash flow of the new sports shoe project. State the total after-tax cash flow for the project from year 0 to year 5.
(b) Assume a 15% required rate of return, should Dunlop Inc. invest in the newproject if the net present value rule is used?

Answer rating: 100% (QA)

a Initial outlay 15120000 b NPV 8472184 Stepbystep explanation Explanation Prepare the table showin... View the full answer