Unit 4 Individual Project

Deliverable Length: 2-3 pages
Details: 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%.

To receive full credit on this assignment, please show all work, including formulae and calculations used to arrive at financial values.

Assignment Guidelines:

Using the information in the assignment description:
Prepare a statement showing the incremental cash flows for this project over an 8-year period.
Calculate the payback period (P/B) and the net present value (NPV) for the project.
Answer the following questions based on your P/B and NPV 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.

To calculate the incremental cash flows for this project over an 8-year period, we need to consider the revenue, direct costs, indirect costs, depreciation, net investment, tax rate, and cost of capital. Here is the calculation:

Year 1:
Revenue: $950,000
Direct costs: 55% of revenue = 0.55 * $950,000
Indirect costs: $80,000
Depreciation: $1,000,000 / 5 years
Net investment: $200,000
Taxable income: (Revenue - Direct costs - Indirect costs - Depreciation) * (1 - Tax rate)
Net cash flow: Taxable income * (1 - Tax rate) + Depreciation

Years 2-8:
Revenue: $1,500,000
Direct costs: 55% of revenue = 0.55 * $1,500,000
Indirect costs: $80,000
Depreciation: $1,000,000 / 5 years
Net investment: $200,000
Taxable income: (Revenue - Direct costs - Indirect costs - Depreciation) * (1 - Tax rate)
Net cash flow: Taxable income * (1 - Tax rate) + Depreciation

To calculate the payback period (P/B) and the net present value (NPV) for the project, we need to consider the incremental cash flows and the cost of capital.

To calculate the payback period (P/B), we determine how long it takes for the cumulative cash flows to equal the initial investment. We count the number of years until this point.

To calculate the net present value (NPV), we discount the incremental cash flows using the cost of capital. The NPV is the sum of the present values of the cash flows minus the initial investment.

Now, let's answer the questions based on the P/B and NPV calculations:

1. Should the project be accepted?
To determine if the project should be accepted, we evaluate if the P/B and NPV are favorable. If the P/B is less than the required payback period of 3 years and the NPV is positive, it is generally recommended to accept the project. If both criteria are met, the project is expected to generate positive cash flows and provide a return above the cost of capital.

2. How would the additional investment in land and building affect the decision?
If the project requires additional investment in land and building, this would increase the initial investment, thus impacting the payback period and NPV calculations. The additional costs would result in a longer payback period and potentially reduce the NPV. It would be necessary to recalculate the payback period and NPV with the updated investment amount to make an informed decision.

Remember to substitute the given values into the formulas and perform the calculations to get the specific numbers required for the statement of incremental cash flows, payback period, and net present value.