Financial Management

Background History

Superior Manufacturing is thinking of launching a new product. The company expects to contend $950,000 of the new product in the first year and $1,500,000 distributively year on that pointafter. Direct equals including labor and materials give be 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project requires a new plant that will cost a total of $1,000,000, which will be depreciated rightful(a) billet over the next five years. The new line will also require an additional net coronation in inventory and receivables in the amount of $200,000. get there is no need for additional coronation in build and land for the project. The firms marginal tax rate is 35%, and its cost of capital is 10%. Based on this information you are to complete the following tasks.

1. Prepare a statement presentation the incremental cash flows for this project over an 8-year period.

2. Calculate the payback Period (P/B) and the NPV for the project.

3. Based on your answer for question 2, do you think the project should be accepted? Why? Assume Superior has a P/B (payback) policy of not accepting projects with life of over three years.

4. If the project call for additional investment in land and building, how would this affect your close? Explain.

Answer Question 1.

First of all we need to order the data and do some preliminary calculations.

-Initial investment:

The total initial investment (I) is the sum of money invested in plant and

equipment.

I = $1,000,000

-Working Capital:

The additional net investment in inventory and receivables is the

working capital requisite for the project:

WC = $200,000

assuming that it will not change over the projects life. whence Working Capital Change for each year Yi is:

ChWCi = old Year WC - Current WC = 0 (i=1...

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