Assignment 6
BUSI 721
Data Driven Finance I
Jones Graduate School of Business
Rice University
Calculate the net present value of the following project. Submit an Excel workbook.
The XYZ company is considering launching a new product. Sales of the product are expected to rise and then diminish, and it is anticipated that the product will be abandoned after five years.
Sales (in millions of dollars) are projected as follows:
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| 100 | 150 | 200 | 120 | 80 |
Labor and material costs for the product would be 50% of sales revenue.
For the first two years, the new product would reduce sales of existing products by $20 million and $10 million, respectively. The existing products have the same 50% gross margin.
Incremental selling, general, and administrative expenses are forecast to be (in millions of dollars):
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| 20 | 25 | 15 | 10 | 5 |
- The new product would require an investment of $100 million in 10-year MACRS equipment. The depreciation rates for the first five years are 10%, 18%, 14.4%, 11.52%, and 9.22%.
- It is anticipated that the equipment could be sold for $60 million in five years.
- $15 million of materials inventory would be required immediately, and accounts payable would increase by $5 million.
- Afterwards, receivables would be 8% of sales, inventory would be 20% of COGS, and accounts payable would be 12% of COGS.
- All working capital would be recovered in five years.
- The corporate tax rate is 30%.
- The cost of capital is 12%.