Superior Manufacturing 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 will 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 straight line over the next five years. 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 and land for the project. The firm's marginal tax rate is 35%, and its cost of capital is 10%. 1. Prepare a statement showing 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. Total Investment = $1,500,000+$200,000=$1,700,000 1. Prepare a statement showing the incremental cash flows for this project over an 8-year period. Year 0 1 2 3 4 5 6 7 8
Sales $950,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000
Less:Direct Cost $522,500 $825,000 $825,000 $825,000 $825,000 $825,000 $825,000 $825,000
Less:Indirect Cost $95,000 $95,000 $95,000 $95,000 $95,000 $95,000 $95,000 $95,000
Less: Depreciation $300,000 $300,000 $300,000 $300,000 $300,000
EBIT $32,500 $280,000 $280,000 $280,000 $280,000 $580,000 $580,000 $580,000
Taxes $11,375 $98,000 $98,000 $98,000 $98,000 $203,000 $203,000 $203,000
EAT $21,125 $182,000 $182,000 $182,000 $182,000 $377,000 $377,000 $377,000
Add:Depreciation $300,000 $300,000 $300,000 $300,000 $300,000
Cash Flow from Opreation $321,125 $482,000 $482,000 $482,000 $482,000 $377,000 $377,000 $377,000
Investment