50.1K

Verified Solution

Link Copied!

Suppose you want to launch a new business. Starting the business would necessitate an initial equipment purchase of $$375,000.$ Additionally, you have previously received a market analysis study from C&D Marketing that cost $$60,000.$ You also have already paid a freelancer $$25,000$ to design your website and logo$.$ You are projecting this project for the next $8$ years, but are using the MACRS $10$ year depreciation schedule $($fully depreciating the equipment according to the schedule$).$

Your market analysis along with your own projections$/$requirements showed the following:

$$ In your first year you would sell $8,500$ units

$$ The price in the $1$st year would be $$25$

$$ Your unit COGS would be $33\%$ of the sales price

$$ Annual overhead would cost $$85,000$

$$ You would require an initial net working capital $($NWC$)$ investment of $$14,000$

$$ You assume a tax rate of $24\%$

$$ You also assume you will be able to sell the equipment for $$40,000$ at the end of the project in $8$ years.

$$ Unit sales $($beyond the first year$)$ are expected to grow $4\%$ per year

$$ You should also be able to increase prices by $2\%$ each year

$$ Each year you will have to increase NWC by $15\%$ of the expected change in sales $($so NWC investment in year $1$ is based on the expected change in sales from year $1$ to year $2)$

$$ All NWC investment is recovered at the end of the project

$$ Based on the risk, you need to make a $11\%$ return on this project

a$.$ What is total cash flow in Year $0?$ Explain.

b$.$ Should you pursue this new business? Explain.

Answer & Explanation Solved by verified expert

See Answer