Financial Management

In: Business and Management

Submitted By wramerson3
Words 424
Pages 2
Unit 4
Willard Amerson
American InterContinental University

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 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 a depreciated straight line over the next 5 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 the land for the project. The firm's marginal tax rate is 35%, and its cost of capital is 10%.
The initial investment is $1mil. The working capital is the net investment and inventory or $200,000. This will not change over the life of the project. We also have to in the depreciation of the purchased plant, which is $1mil divided by 5 years. (Note: only the first five years will claim this depreciation credit for the plant and equipment.) Revenues or sales for the new product will be $950,000. The yearly indirect costs or expenses will be 55% times that year’s revenue, plus $80,000. Taxes are calculated at 35% times the gross profit. Gross profit is derived from adding the direct costs, indirect costs and the depreciation (5years only), and subtracting from that years revenue.
Once these factors are calculated, then the future value and present value of the dollar must be utilized. For the future value of $1, 10% rate is calculated. (1*(1+0.1)) The Fv=$1.10. From the future value, the present value is then calculated. (1/($1.10)*$1.00. The Pv= $0.91. The Pv must be calculated for each year up to 9 years. (1/ ($1.10^2)) The factor utilized in squaring, is the number of that year; ^2 in year two,…...

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