Net Present Value Analysis

Emery Communications Company is considering the production and marketing of a communications system that will increase the efficiency of messaging for small businesses or branch offices of large companies. Each unit hooked into the system is assigned a mailbox number, which can be matched to a telephone extension number, providing access to messages $24$ hours a day. Up to $20$ units can be hooked into the system, allowing the delivery of the same message to as many as $20$ people. Personal codes can be used to make messages confidential. Furthermore, messages can be reviewed, recorded, cancelled, replied to$,$ or deleted all during the same message playback. Indicators wired to the telephone blink whenever new messages are present.

To produce this product, a $$1\mathrm{.}75$ million investment in new equipment is required. The equipment will last $10$ years but will need major maintenance costing $$150,000$ at the end of its sixth year. The salvage value of the equipment at the end of $10$ years is estimated to be $$100,000.$ If this new system is produced, working capital must also be increased by $$90,000.$ This capital will be restored at the end of the product's $10-$year life cycle. Revenues from the sale of the product are estimated at $$1\mathrm{.}65$ million per year. Cash operating expenses are estimated at $$1\mathrm{.}32$ million per year.

Required:

Question Content Area

Two present value tables are provided: Present Value of a Single Amount and Present Value of an Annuity. Use them as directed in the problem requirements.

Question Content Area

$1.$ Prepare a schedule of cash flows for the proposed project. $($Assume that there are no income taxes.$)$ If an amount is negative or an outflow, first enter a minus sign $(-).$

blank

Emery Communications Company

Schedule of Cash Flows

Line Item Description Amount

Year $0$

$$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

Years $1-5$

$$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

Year $6$

$$-$ Select $-$

$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

Years $7-9$

$$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

Year $10$

$2($a$)$ Assuming that Emery's cost of capital is $12\%,$ compute the project's NPV$.$ For discount factors, use the tables shown in Present Value Tables tab. Round the present value calculation and your final answer to the nearest whole dollar. If an amount is negative, first enter a minus sign $(-).$

The NPV of the project is fill in the blank $1$ of $1$$

$.$

$2($b$)$ Should the product be produced?

$,$ the new product

produced.