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.)• The project has an anticipated economic life of 4 years. • The company will have to purchase a new machine to produce the detergent. The machine has an up-front cost (t = 0)• If the company goes ahead with the proposed product, it will have an effect on the company's net operating 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 operating working capital will be recovered after the project is completed.
• The detergent is expected to generate sales revenue of $1 million the first year (t = 1)• The company's interest expense each year will be $100,000.
• 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)• The company's overall WACC is 10 percent. However, the proposed project is riskier than the average project for Parker; the project's WACC is estimated to be 12 percent.
• The company's tax rate is 40 percent.
What is the net present value of the proposed project?

Question

Quizplus · Accepted Answer

The Answer of 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.)• The project has an anticipated economic life of 4 years. • The company will have to purchase a new machine to produce the detergent. The machine has an up-front cost (t = 0)• If the company goes ahead with the proposed product, it will have an effect on the company's net operating 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 operating working capital will be recovered after the project is completed.
• The detergent is expected to generate sales revenue of $1 million the first year (t = 1)• The company's interest expense each year will be $100,000.
• 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)• The company's overall WACC is 10 percent. However, the proposed project is riskier than the average project for Parker; the project's WACC is estimated to be 12 percent.
• The company's tax rate is 40 percent.
What is the net present value of the proposed project?

Parker Products Manufactures a Variety of Household Products