Superior Manufacturing 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 55% of sales. Indirect incremental costs are
estimated at $80,000 a year. The project requires a new plant that
will cost a total of $1,000,000, which will be depreciated straight
line over the next five 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 and land for the project. The firm's marginal tax rate is
35%, and its cost of capital is 10%. Based on this information you
are to complete the following tasks.
Prepare a statement showing the incremental cash flows for this
project over an 8-year period. |