Drilling-Easy (DE) Inc. currently has two? products, low-priced drills and a line of smart drill bits....

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Drilling-Easy (DE) Inc. currently has two? products, low-priceddrills and a line of smart drill bits. DE Inc. has decided to sella new line of? high-priced drills. Sales for the new line of drillsare estimated at ?$27million a year. Annual variable costs are 60?%of sales. The project is expected to last 10 years. In addition tothe production variable? costs, the fixed costs each year will be?$4,000,000. The company has spent ?$1,000,000 in a marketing andresearch study that determined the company will gain ?$11 millionin sales a year of its existing line of smart drill bits. Theproduction variable cost of these sales is ?$9 million a year. Theplant and equipment required for producing the? high-priced drillscosts ?$11,000,000 and will be depreciated down to zero over 10years using? straight-line depreciation. It is expected that theplant and equipment can be sold for ?$4,000,000 at the end of theproject. The project will also require an increase in net workingcapital of ?$3,000,000 today that will be returned at the end ofthe project. The tax rate is 20 percent and the require rate ofreturn for this project is 10?%.
A. What is the Initial Outlay (IO) for this project?
B. What is the operating cash flows (OCF) for each of the yeasof the project?
C. What is the termination value (TV) cash flow (aka recoverycost or after tax salvage value, or liquidation value of theassets) at the end of the project?
D. What is the NPV of this project?
Please show all steps because I am very new to finance.

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4.0 Ratings (809 Votes)

A Plant and equipment 11000000 Increase in NWC 3000000 Initial outlay for the project 14000000 B Sales 27000000 Variable cost 60 16200000 Fixed costs See Answer

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Drilling-Easy (DE) Inc. currently has two? products, low-priceddrills and a line of smart drill bits. DE Inc. has decided to sella new line of? high-priced drills. Sales for the new line of drillsare estimated at ?$27million a year. Annual variable costs are 60?%of sales. The project is expected to last 10 years. In addition tothe production variable? costs, the fixed costs each year will be?$4,000,000. The company has spent ?$1,000,000 in a marketing andresearch study that determined the company will gain ?$11 millionin sales a year of its existing line of smart drill bits. Theproduction variable cost of these sales is ?$9 million a year. Theplant and equipment required for producing the? high-priced drillscosts ?$11,000,000 and will be depreciated down to zero over 10years using? straight-line depreciation. It is expected that theplant and equipment can be sold for ?$4,000,000 at the end of theproject. The project will also require an increase in net workingcapital of ?$3,000,000 today that will be returned at the end ofthe project. The tax rate is 20 percent and the require rate ofreturn for this project is 10?%.A. What is the Initial Outlay (IO) for this project?B. What is the operating cash flows (OCF) for each of the yeasof the project?C. What is the termination value (TV) cash flow (aka recoverycost or after tax salvage value, or liquidation value of theassets) at the end of the project?D. What is the NPV of this project?Please show all steps because I am very new to finance.