Assignment:
Heck 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 the second and third year and $2,000,000 per year thereafter. Direct costs including labor and materials will be 40% of sales. Indirect incremental costs are estimated at $110,000 a year. The project requires a new plant that will cost a total of $2,000,000, which will be a depreciated straight line over the next 5 years.
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:
o Prepare a statement showing the incremental cash flows for this project over an 8-year period.
o Calculate the payback period (P/B) and the net present value (NPV) for the project.
o Answer the following questions based on your P/B and NPV calculations:
• Do you think the project should be accepted? Why?
o Assume the company has a P/B (payback) policy of not accepting projects with life of over 4.5 years.
• If the project required additional $1,000,000 investment in land and building, how would this affect your decision? Explain.