ICoug can manufacture the new vacuum, SurperClean V1, for $650 per unit in variable costs. Fixed costs for the operation are estimated to come to $25 million per year. The estimated sales volumes (in units) are 450,000, 400,000, and 300,000 vacuums per year for the next three years, respectively. The unit price (per vacuum) of the new vacuum, SurperClean V1, will be $830. The necessary equipment can be purchased for $30 million and will be depreciated on a five-year MACRS schedule. It is believed the market value of the equipment in three years will be $1.5 million.
As previously stated, ICoug currently manufactures the SmartClean X1. Due to poor sales, production of the existing product is expected to be terminated in two years. If ICoug does not introduce the new SurperClean V1, sales of the existing product will be 250,000 and 200,000 units per year for the next two years, respectively. The price of the current vehicle, SmartClean X1, is $700 per unit/ vacuum, with variable costs of $500 each and fixed costs of $16 million per year. If ICoug does introduce the new SurperClean V1, sales of the existing vacuum will fall by 50,000 units per year, and the price of the existing vacuum, the SmartClean X1, will have to be lowered by $40 per vacuum.
 

Net working capital for the new project will be 18% of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year's sales. ICoug has a 33% corporate tax rate. The company has a target debt-to-equity ratio of 0.5 and is currently Triple-B-rated (according to S&P 500 ratings). The overall cost of capital for ICoug is 7%.

Can you prepare the income statement and the total cash flow (CFFA) table for this new project?
Also compute the NPV and IRR of ICoug's new project.

Answer rating: 100% (QA)

Here are the steps to solve this problem 1 Calculate annual income statements for introducing the ne... View the full answer