Incremental Cash Flows

Business, Financial Markets and Services

Year 4

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

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%. Based on this information you are to complete the following tasks.

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

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

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.

If the project required additional investment in land and building, how would this affect your decision? Explain.

A resource on financial functions in Excel is available in the Labs area. Click "Labs," then "Student Success Learning Lab." Click "Presentation Material" in the left navigation bar. Choose "Financial Functions" to download the file. When asked, be sure to click "Save," rather than "Open."

To receive full credit on this assignment, please show all work, including formulae and calculations used to arrive at financial values. Submit your work to your instructor via the drop box.

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Business, Financial Markets and Services

Year 4

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

Solution

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

The statement is in the attached excel file. The sales are as given. The direct costs have been taken as 55% of sales. The indirect incremental costs are $80,000 per year. The plant costs $1,000,000 and straight line depreciation over 5 years is 1,000,000/5=200,000. The investment in Inventory and Receivables