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%.