Parker Products manufactures a variety of household products. The company is considering introducing a new detergent....

70.2K

Verified Solution

Question

Finance

Parker Products manufactures a variety of household products.The company is considering introducing a new detergent. Thecompany's CFO has collected the following information about theproposed product. (Note: You may or may not need to useall of this information, use only the information that isrelevant.)
·
The project has an anticipated economic life of 3 years.
·
The company will have to purchase a new machine to produce thedetergent. The machine has an up-front cost (t = 0) of $2.1million. The machine will be depreciated on a straight-line basisover 3 years (that is, the company's depreciation expense will be$700,000 in each of the three years (t = 1, 2, and 3). The companyanticipates that the machine will last for three years, and thatafter four years, its salvage value will equal zero.
·
If the company goes ahead with the proposed product, it willhave an effect on the company's net operating working capital. Atthe outset, t = 0, inventory will increase by $600,000 and accountspayable will increase by $220,000. At t = 3, the net operatingworking capital will be recovered after the project iscompleted.
·
The detergent is expected to generate sales revenue of $3million the first year (t = 1), $4 million the second year (t = 2),and $5 million the third year (t = 3). Each year the operatingcosts (not including depreciation) are expected to equal 50percent of sales revenue.
·
The company's interest expense each year will be $200,000.
·
The new detergent is expected to reduce the after-taxcash flows of the company's existing products by $400,000a year (t = 1, 2, and 3).
·
The company's overall WACC is 12 percent. However, the proposedproject is riskier than the average project for Parker; theproject's WACC is estimated to be 13 percent.
·
The company's tax rate is 40 percent.

Estimate the project net cash flows. Make sure to put the cashflows in order: CF0 in box 1, CF1 in Box 2, CF2 in Box 3, etc.Round it to a whole dollar, and do notinclude the $ sign.
In box 5 (last one), compute the project's NPV. Round it toa whole dollar, and do not include the $sign.

Answer & Explanation Solved by verified expert

4.3 Ratings (881 Votes)

Interest expense is a financing cash flow and therefore not tobe included in calculating the See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Parker Products manufactures a variety of household products.The company is considering introducing a new detergent. Thecompany's CFO has collected the following information about theproposed product. (Note: You may or may not need to useall of this information, use only the information that isrelevant.)·The project has an anticipated economic life of 3 years.·The company will have to purchase a new machine to produce thedetergent. The machine has an up-front cost (t = 0) of $2.1million. The machine will be depreciated on a straight-line basisover 3 years (that is, the company's depreciation expense will be$700,000 in each of the three years (t = 1, 2, and 3). The companyanticipates that the machine will last for three years, and thatafter four years, its salvage value will equal zero.·If the company goes ahead with the proposed product, it willhave an effect on the company's net operating working capital. Atthe outset, t = 0, inventory will increase by $600,000 and accountspayable will increase by $220,000. At t = 3, the net operatingworking capital will be recovered after the project iscompleted.·The detergent is expected to generate sales revenue of $3million the first year (t = 1), $4 million the second year (t = 2),and $5 million the third year (t = 3). Each year the operatingcosts (not including depreciation) are expected to equal 50percent of sales revenue.·The company's interest expense each year will be $200,000.·The new detergent is expected to reduce the after-taxcash flows of the company's existing products by $400,000a year (t = 1, 2, and 3).·The company's overall WACC is 12 percent. However, the proposedproject is riskier than the average project for Parker; theproject's WACC is estimated to be 13 percent.·The company's tax rate is 40 percent.Estimate the project net cash flows. Make sure to put the cashflows in order: CF0 in box 1, CF1 in Box 2, CF2 in Box 3, etc.Round it to a whole dollar, and do notinclude the $ sign.In box 5 (last one), compute the project's NPV. Round it toa whole dollar, and do not include the $sign.

·	The project has an anticipated economic life of 3 years.
·	The company will have to purchase a new machine to produce thedetergent. The machine has an up-front cost (t = 0) of $2.1million. The machine will be depreciated on a straight-line basisover 3 years (that is, the company's depreciation expense will be$700,000 in each of the three years (t = 1, 2, and 3). The companyanticipates that the machine will last for three years, and thatafter four years, its salvage value will equal zero.
·	If the company goes ahead with the proposed product, it willhave an effect on the company's net operating working capital. Atthe outset, t = 0, inventory will increase by $600,000 and accountspayable will increase by $220,000. At t = 3, the net operatingworking capital will be recovered after the project iscompleted.
·	The detergent is expected to generate sales revenue of $3million the first year (t = 1), $4 million the second year (t = 2),and $5 million the third year (t = 3). Each year the operatingcosts (not including depreciation) are expected to equal 50percent of sales revenue.
·	The company's interest expense each year will be $200,000.
·	The new detergent is expected to reduce the after-taxcash flows of the company's existing products by $400,000a year (t = 1, 2, and 3).
·	The company's overall WACC is 12 percent. However, the proposedproject is riskier than the average project for Parker; theproject's WACC is estimated to be 13 percent.
·	The company's tax rate is 40 percent.