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Date Posted: 03:06:00 03/01/04 Mon
Author: Doug Alexander
Subject: Re: Another Sample Exam 1
In reply to: Charles Hodges 's message, "Another Sample Exam 1" on 12:44:20 02/15/01 Thu

>
Could I get the solution to this problem? Thank you for your help.
Doug Alexander (MBA candidate at WTAMU)

> 4. (20 points) Parker Products manufactures a variety
>of household products. The company is considering
>introducing a new detergent. The company's CFO has
>collected the following information about the proposed
>product. (Note: You may or may not need to use all of
>this information, use only the information that is
>relevant.)
>
>a. The project has an anticipated economic life of 4
>years. To assess the demand for the new product, last
>year the company conducted a marketing survey that
>cost $60,000.
>b. The company will have to purchase a new machine to
>produce the detergent. The machine has an up-front
>cost (t = 0) of $2 million. The machine will be
>depreciated on a straight-line basis over 4 years
>(that is, the company's depreciation expense will be
>$500,000 in each of the first four years (t = 1, 2, 3,
>and 4).) The company anticipates that the machine will
>last for four years, and that after four years, its
>salvage value will equal $0. However, due to
>environmental concerns about the machine it will cost
>$50,000 to dispose of the machine at the end of the
>project.
>c. If the company goes ahead with the proposed
>product, it will have an effect on the company's net
>working capital. At the outset, t = 0, inventory will
>increase by $140,000 and accounts payable will
>increase by $40,000. At t = 4, the net working capital
>will be recovered after the project is completed.
>d. The detergent is expected to generate sales revenue
>of $1 million the first year (t = 1), $2 million the
>second year (t = 2), $2 million the third year (t =
>3), and $1 million the final year (t = 4). Each year
>the operating costs (not including depreciation) are
>expected to equal 50 percent of sales revenue.
>e. The company's interest expense each year will be
>$100,000.
>f. The new detergent is expected to reduce the
>after-tax cash flows of the company's existing
>products by $250,000 a year (t = 1, 2, 3, and 4).
>g. The proposed project is riskier than the average
>project for Parker; the project's Cost of Capital is
>estimated to be 12 percent.
>h. The company's tax rate is 40 percent.
>
>What is the net present value of the proposed project?

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