# a-manufacturing-company-is-thinking-of-launching-a-new-product-2

FINA310 4

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 45% of sales. Indirect incremental costs are estimated at \$95,000 a
year. The project requires a new plant that will cost a total of \$1,500,000,
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%.

including formulae and calculations used to arrive at financial values.

Assignment Guidelines:

·
Using the information in the
assignment description:

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

o Calculate the payback period (P/B) and the net present value
(NPV) for the project.

calculations:

§ Do you think the project should be accepted? Why?

§ Assume the company has a P/B (payback) policy of not
accepting projects with life of over 3 years.

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

·
A double-spaced Word document of
any formulae that you used, and your answers to the two questions listed in the
assignment guidelines.

o You must include your explanation of how you used Microsoft
Excel for your calculations if applicable.

You will be graded on the accuracy of your value calculations as
well as your demonstrated understanding of payback periods, net present value,
and cash flows.

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