You must analyze a potential new product—a caulking compound that Cory Materials’ R&D people developed for use in the residential construction industry. Cory’s marketing manager thinks the company can sell 115,000 tubes per year at a price of $3.25 each for 3 years, after which the product will be obsolete. The purchase price of the required equipment, including shipping and installation costs, is $175,000, and the equipment is eligible for 100% bonus depreciation at the time of purchase. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payable and accruals) would rise by $15,000. Variable cost per unit is $1.95, and fixed costs would be $70,000 per year. When production ceases after 3 years, the equipment should have a market value of $15,000. Cory’s tax rate is 25%, and it uses a 10% WACC for average-risk projects. Find the required Year 0 investment outlay after bonus depreciation is considered and the project’s annual cash flows. Then calculate the project’s NPV, IRR, MIRR, and payback. Assume at this point that the project is of average risk. Suppose you now learn that R&D costs for the new product were $30,000 and that those costs were incurred and expensed for tax purposes last year. How would this affect your estimate of NPV and the other profitability measures? If the new project would reduce cash flows from Cory’s other projects and if the new project would be housed in an empty building that Cory owns and could sell, how would those factors affect the project’s NPV?
You must analyze a potential new product—a caulking compound that Cory Materials’ R&D people developed for use in the residential construction industry. Cory’s marketing manager thinks the company can sell 115,000 tubes per year at a price of $3.25 each for 3 years, after which the product will be obsolete. The purchase price of the required equipment, including shipping and installation costs, is $175,000, and the equipment is eligible for 100% bonus
Find the required Year 0 investment outlay after bonus depreciation is considered and the project’s annual cash flows. Then calculate the project’s NPV,
Suppose you now learn that R&D costs for the new product were $30,000 and that those costs were incurred and expensed for tax purposes last year. How would this affect your estimate of NPV and the other profitability measures?
If the new project would reduce cash flows from Cory’s other projects and if the new project would be housed in an empty building that Cory owns and could sell, how would those factors affect the project’s NPV?
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