Question Details

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.
 
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. 
 
3.	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. 
 
4.	If the project required additional investment in land and building, how would this affect your decision? Explain. 
 
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To receive full credit on this assignment, please show all work, including formulae and calculations used to arrive at financial values.
 

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