You are evaluating a new project for Globex Corporation as the company is planning to launch a new and very efficient mobile device named Meta-5050. The new product is expected to run for 5 years. To produce this new product, Globex needs to purchase new equipment that will cost $750,000. The company needs to spend another $10,000 for shipping and installation. You estimate the sales price of Meta-5050 to be $650 per unit and sales volume to be 800 units in year 1; 1,400 units in years 2-4; and 500 units in year 5. The cost of the contents, packaging and shipping are expected to be $225 per unit and the annual fixed costs for this project are $150,000 per year. The equipment will be depreciated straight-line to zero over the 5-year project life. The actual market value (salvage value) of these assets at the end of year 5 is expected to be $35,000. If this project is taken up, inventory will increase by $72,000, accounts receivable will increase by $36,850, and accounts payable will increase by $35,000 in the beginning. Assume a tax rate of 25% and the cost of capital for the company is 10%. What will the cash flows for this project be? Will you accept this project? Why or why not?
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
You are evaluating a new project for Globex Corporation as the company is planning to launch a new and very efficient mobile device named Meta-5050. The new product is expected to run for 5 years.
To produce this new product, Globex needs to purchase new equipment that will cost $750,000. The company needs to spend another $10,000 for shipping and installation.
You estimate the sales price of Meta-5050 to be $650 per unit and sales volume to be 800 units in year 1; 1,400 units in years 2-4; and 500 units in year 5. The cost of the contents, packaging and shipping are expected to be $225 per unit and the annual fixed costs for this project are $150,000 per year. The equipment will be depreciated straight-line to zero over the 5-year project life. The actual market value (salvage value) of these assets at the end of year 5 is expected to be $35,000.
If this project is taken up, inventory will increase by $72,000, accounts receivable will increase by $36,850, and accounts payable will increase by $35,000 in the beginning.
Assume a tax rate of 25% and the cost of capital for the company is 10%. What will the cash flows for this project be? Will you accept this project? Why or why not?
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