$
1,500,000.00

New
Plant Total Cost

$
950,000.00
45%
$ 427,500.00
Direct Costs (Labor &
Material) 1st Year

a depreciated straight line over the
next 5 years

$ 95,000.00
Indirect Incremental
Costs

$
1,500,000.00
5
$ 300,000.00
New Plant Depreciation straight line
over the next 5 years

Net Investment in
Inventory and Receivables $200,000

$
1,500,000.00
0.45
$ 675,000.00
Direct Costs (Labor &
Material) 2nd Year

$ 95,000.00
Indirect Incremental
Costs

$
1,500,000.00
5
$ 300,000.00
New Plant Depreciation straight line
over the next 5 years

A manufacturing company
is thinking of launching a new product. The company expects to sell
$950,000

of the new product in
the first year and $1,500,000 each year thereafter. Direct costs including
labor and materials

$
1,500,000.00
0.45
$ 675,000.00
Direct Costs (Labor &
Material) 3rd Year

will be 45% of sales.
Indirect incremental costs are estimated at $95,000 a year. The project
requires a new plant that

$ 95,000.00
Indirect Incremental
Costs

will cost a total of
$1,500,000, which will be a depreciated straight line over the next 5 years.
The new line will also

$
1,500,000.00
5
$ 300,000.00
New Plant Depreciation straight line
over the next 5 years

require an
additional net investment in inventory and receivables in the amount
of $200,000.

$
1,500,000.00
0.45
$ 675,000.00
Direct Costs (Labor &
Material) 4th Year

Assume there is no need
for additional investment in building the land for the project.

$ 95,000.00
Indirect Incremental
Costs

The firm’s marginal tax
rate is 35%, and its cost of capital is 10%.

$
1,500,000.00
5
$ 300,000.00
New Plant Depreciation straight line
over the next 5 years

Prepare a statement
showing the incremental cash flows for this project over

$
1,500,000.00
0.45
$ 675,000.00
Direct Costs (Labor &
Material) 5th Year

a 8-year period.

$ 95,000.00
Indirect Incremental
Costs

$
1,500,000.00
5
$ 300,000.00
New Plant Depreciation straight line
over the next 5 years

Calculate the payback
period (P/B) and the net present value (NPV) for the project

$
1,500,000.00
0.45
$ 675,000.00
Direct Costs (Labor &
Material) 6th Year

Answer the following
questions based on your P/B and NPV calculations:

$ 95,000.00
Indirect Incremental
Costs

Do you think the project
should be accepted? Why?

Assume the company has a
P/B (payback) policy of not accepting

$
1,500,000.00
0.45
$ 675,000.00
Direct Costs (Labor &
Material) 7th Year

projects w/life of over 3
years.

$ 95,000.00
Indirect Incremental
Costs

If the project required
additional invest in land and building, how would this

affect your decision?
Explain.

$
1,500,000.00
0.45
$ 675,000.00
Direct Costs (Labor &
Material) 8th Year

$ 95,000.00
Indirect Incremental
Costs