Superior Manufacturing is lauching a new product, that is expected to sell $950,000 of its new product the first year alone, and $1,500,000 each year thereafter. Direct cost labor and materials will be 55% in sales.indirect cost is $80,000 a year, the project requires a new plant with total cost of $1,000,000,which will depreciate in the next five years. A new line will require additional net investment in inventory, and receivable in the amount of $200,000. Assume no need for investment in building and land project. The firm's marginal tax rate is 35%, capital cost is 10%
1. Prepare statement showing the incremental cash flows for project over 8-year period.
2. Calculate payback period (P/B) and the NPV for the project.
3. Your answer for 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?
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