Problem
The director of RCM Inc. plans to launch a new product. The initial investment in equipment and other amenities is $800,000. Management has been thinking about launching this new product for some time. They made several trips to different cities to understand the potential demand, and finally decided to launch this product. These trips have cost the company about $50,000 so far. The project will have an estimated lifespan of 5 years. The first year's revenue is expected to be $600,000, and the revenue is expected to remain the same for the duration of the project. Operating costs for the project are estimated at $200,000 per year. If the project is undertaken, the total investment in net working capital will increase by $100,000 at the beginning of the project, but the company will recover 50% of its investment in net working capital at the end of year 5. The tax rate is 30%, and the capital cost allowance is 20%. The equipment can be sold at the end of the project for $150,000. The appropriate discount rate for the project is 9%. Calculate the NPV to see if the company should undertake this project or not.