Calculate NPV and Payback Period for a project:

  • A manufacturing company is thinking of launching a new product.
  • Incremental Revenue: The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter.
  • Incremental Direct costs including labor and materials: will be 45% of sales.
  • Indirect incremental costs: estimated at $95,000 a year.
  • Project Investment: The project requires a new plant that will cost a total of $1,500,000
  • Depreciation (Incremental Project depreciation): new plane will be a depreciated straight line over the next 5 years.
  • Additional investment in year zero: The new line will also require an additional net investment in inventory and receivables in the amount of $200,000.
  • Assume there is no need for additional investment in building the land for the project. The firm’s marginal tax rate is 35%, and its cost of capital is 10%.
  • Using the information in the assignment description:
    • Prepare a statement showing the incremental cash flows for this project over an 8-year period.
    • Calculate the payback period (P/B) and the net present value (NPV) for the project.
    • Answer the following questions based on your P/B and NPV calculations:
  1. Do you think the project should be accepted? Why?
    • Assume the company has a P/B (payback) policy of not accepting projects with life of over 3 years.
  2. If the project required additional investment in land and building, how would this affect your decision? Explain.

We want to figure out net incremental after-taxcash flows for each year, and then determine their present value

Assume that the plant ceases operations in year 8 and we get back out our incremental working capital.

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