You must analyze a potential new product—a caulking compound that Cory Materials’ R&D people developed for use...

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You must analyze a potential new product—a caulking compoundthat Cory Materials’ R&D people
developed for use in the residential construction industry.Cory’s marketing manager thinks they
can sell 115,000 tube per year at a price of $3.25 per year for3 years, after which the product will
be obsolete. The required equipment would cost $150,000, plusanother $25,000 for shipping and
installation. Current assets would increase by $35,000 whilecurrent liabilities would rise by
$15,000. Variable costs would be 60% of sales revenues, fixedcosts (excluding depreciation)
would be $70,000 per year, and fixed assets would be depreciatedunder MACRS with a 3-year life.
The relative depreciation rates would be 33.33%, 44.44%, 14.82%and 7.41%. When production
ceases after 3 years, the equipment will have a market value of$15,000. Cory’s tax rate is 40%
and it uses a 10% wacc for average-risk projects.
a.
Calculate the project’s NPV, IRR, MIRR, PI, payback anddiscounted payback.

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4.3 Ratings (704 Votes)

Time line 0 1 2 3 Cost of new machine 175000 Initial working capital 20000 Initial Investment outlay 195000 3 years MACR rate 3333 4445 1481 741 Unit sales 115000 115000 115000 Profits no of units sold sales price variable cost 149500 149500 149500 Fixed cost 70000 70000 70000 Depreciation Cost of machineMACR 583275 777875 259175 129675 Salvage Value Pretax cash flows 211725 17125 535825 taxes Pretax cash flows1tax 127035 10275 321495 Depreciation 583275 777875 259175 after tax operating cash flow 71031 78815 58067 reversal of working capital 20000 Proceeds from sale of equipment after tax selling price 1 tax See Answer

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You must analyze a potential new product—a caulking compoundthat Cory Materials’ R&D peopledeveloped for use in the residential construction industry.Cory’s marketing manager thinks theycan sell 115,000 tube per year at a price of $3.25 per year for3 years, after which the product willbe obsolete. The required equipment would cost $150,000, plusanother $25,000 for shipping andinstallation. Current assets would increase by $35,000 whilecurrent liabilities would rise by$15,000. Variable costs would be 60% of sales revenues, fixedcosts (excluding depreciation)would be $70,000 per year, and fixed assets would be depreciatedunder MACRS with a 3-year life.The relative depreciation rates would be 33.33%, 44.44%, 14.82%and 7.41%. When productionceases after 3 years, the equipment will have a market value of$15,000. Cory’s tax rate is 40%and it uses a 10% wacc for average-risk projects.a.Calculate the project’s NPV, IRR, MIRR, PI, payback anddiscounted payback.