You have just invented a new type of paper clips and you consider producing them on a
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Question:
This project requires an initial investment of $175,500 in year 0 and is expected to last for 5 years. You plan to spend $10,000 for advertising in year 0 and $2,000 in each of the following years. You also have other expenses of $10,000 per year (excluding year 0).
The price per paper clips box is $2 in the first year and is expected to increase by 3% each subsequent year. You expect to sell 30000 boxes every year starting with year 1.
(a) Construct a table containing the outflows, inflows and net cashflows for each of the years 0-5?
(b) If the discount rate is 0, what is the NPV at year 0?
(c) If the discount rate is 5% should you undertake this project?
(d) What is the maximum discount rate for which the project should be undertaken?
(e) If the uncertainty component of your project is 3%, the inflation rate is expected to be 2.5% per year and the real rate of return on otherinvestment projects is 4.4% should you undertake this project?
Related Book For
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
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