Under a special arrangement, Swineyard Company has an opportunity to market a new product for a five-year
Question:
Under a special arrangement, Swineyard Company has an opportunity to market a new product for a five-year period. The product will be purchased from the manufacturer, with Swineyard Company responsible for all costs of promotion and distribution. The licensing arrangement could be renewed at the end of the five-year period. After careful study, Swineyard Company has estimated the following costs and revenues for the new product:
Cost of equipment needed | $60,000 |
Working capital needed | 100,000 |
Overhaul of equipment in 4 years | 5,000 |
Salvage value of the equipment in 5 years | 10,000 |
Annual Revenue and costs: | |
Sales Revenue | 200,000 |
Cost of Goods Sold | 125,000 |
Operating costs | 35,000 |
At the end of the five year period, the working capital would be released for investment elsewhere if Swineyard decides not to renew the licensing arrangement. Swineyard uses a 14% discount rate to compare projects against. A TVM table with 14% discount rate is attached.
Your job: Compute the Net Present Value of the project and decide whether Swineyard should do it or not.
Additional Notes
Note when the overhaul occurs. This is a one-time cash outflow.
The Working Capital is needed at the beginning of the project. At the end of the project (Year 5) they no longer need it so it becomes a cash inflow.
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston