Statement of Incremental Cash Flows

A manufacturing company is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 45% of sales. Indirect incremental costs are estimated at $95,000 a year. The project requires a new plant that will cost a total of $1,500,000, which will be a depreciated straight line over the next 5 years. The new line will also require an additional net investment in inventory and receivables in the amount of $200,000.

Assume there is no need for additional investment in building the land for the project. The firm’s marginal tax rate is 35%, and its cost of capital is 10%.

To receive full credit on this assignment, please show all work, including formulae and calculations used to arrive at financial values.

Assignment Guidelines

• Using the information in the assignment description:
  • Prepare a statement showing the incremental cash flows for this project over an 8-year period.
  • Calculate the payback period (P/B) and the net present value (NPV) for the project.
  • Answer the following questions based on your P/B and NPV calculations:
    • Do you think the project should be accepted? Why?
      • Assume the company has a P/B (payback) policy of not accepting projects with life of over 3 years.
    • If the project required additional investment in land and building, how would this affect your decision? Explain.

Your submitted assignment (130 points) must include the following:

• A double-spaced Word document of 2–3 pages that contains your calculation values, your complete calculations, any formulae that you used, and your answers to the two questions listed in the assignment guidelines.
  • You must include your explanation of how you used Excel for your calculations if applicable.

You will be graded on the accuracy of your value calculations as well as your demonstrated understanding of payback periods, net present value, and cash flows.

Answer Preview-Statement of Incremental Cash Flows