Howells Tools is considering the launch of a new automatic drill for construction$-$based firms. Market research estimates the development cost of this machine at $75,000.$ The machine will have a commercial salability for the next five years after which it will become obsolete due to technological changes. The sales figures are estimated at $800,000$ in year $1$ at a price of $200.$ The sales volume is expected to increase by $4$ percent every year, and the price is expected to increase by $3$ percent every year. The production of this tool, however, will require an immediate cash outlay of $450,000,$ and it will cost an additional $18,000$ per year to properly maintain the equipment. In year $4,$ there will be a technical certification process that will cost an additional $60,000.$ The total variable cost of production for this product will be $500,000,$ increasing at $4$ percent every year. The cost of capital for Howell Tools is estimated at $8$ percent. Also, consider the research and development cost as relevant for your calculations.

a$.$ Calculate the project cashflows.

b$.$ Calculate the payback period for this project.

c$.$ Calculate the NPV for this project.

Answer rating: 100% (QA)

a Project cashflows Year Cashflow Present value 0 525000 525000 1 14766851852 ... View the full answer