Basis of npv and irr, Corporate Finance

Suppose that Oxford Inc. is interested in the two new products, AME and CGK. Because of its capital budget constraint, it can only launch one new product line. Eric just graduated from the School of Administrative Studies at York University and works for Oxford as an analyst. On Thursday, his manager asked him to evaluate the two new product lines and needs the recommendation by next Monday. Necessary equipment for the production line AME will cost $10 million, including installation costs. Product line AME will also require an initial investment of $3million in net working capital. Product line AME will generate pre-tax revenues that are $5.6 million for the first year. Then the pre-tax revenue will grow at an annual rate of 2 percent for the next 14 years. A new technology will replace the product AME after that. The pre-tax operating costs will be $2.2 million/year for the first 10 years, then $3.3 million/year for the next 5 years. The salvage value of AME will be $0.39 million at the end of year 15.

New equipment and installation costs for product line CGK will be $ 7 million and the initial working capital requirement will also be $3million. Production line CGK will generate pre-tax revenues that are $4.8 million for the first year. Then the pre-tax revenue will then increase at an annual rate of 3 percent for the next 14 years. A new model is in R&D process and will replace the CGK after that. The pre-tax operating costs will be $2.5 million/year for the first year and then grow at an annual rate of 2 percent for the next 14 years. The salvage value of CGK will be $0.27 million at the end of year 15.

The initial equipment purchase falls into a CCA Asset Class 8 at a rate of 20 percent, regardless of which alternative is chosen. Oxford''s corporate tax rate is 40 percent and its rate of required return on such investments is 12 percent. Assume the initial working capital investment will be made at the time of the purchase the equipment for either product line. For simplicity, all cash flows for a given year occur at the end of the year.

If you were Eric, which new product line would you recommend on the basis of NPV and IRR?
Posted Date: 2/24/2013 5:38:32 PM | Location : Canada







Related Discussions:- Basis of npv and irr, Assignment Help, Ask Question on Basis of npv and irr, Get Answer, Expert's Help, Basis of npv and irr Discussions

Write discussion on Basis of npv and irr
Your posts are moderated
Related Questions
Corporation Hallmark, located in California, was in the business of manufacturing custom-ordered greeting cards, boxes, wrapping paper, and other paper products. Its operation is v

Pfizer Incorporated has 2 million shares of common stock, selling at $18 each. The β of the stock is 1.5, T-bill rate is 6%, and the expected return on the market is 12%. Pfizer al

Question : (a) Electronic banking can be defined as "the automated delivery of new and traditional banking products and services directly to customers through electronic, int

Firm A has $10,000 in assets entirely financed with equity. Firm B also has $10,000 in assets, but these assets are financed by $5,000 in debt (with a 10 percent rate of interest)


Ask qCan the goal of maximizing the value of the stock conflict with other goals such as avoiding unethical or illegal behavior? In particular, do subjects like customer and employ

What are "in-market" mergers? A: An in-market merger is one that takes place between two banks operating in the same geographic area, typically a city or metropolitan area. The

Calculating Cost of Equity. Bohannon Corporation''s common stock has a beta of 1.10. If the risk-free rate is 4.5% and the expected return on the market is 12%, what is the company

You are a ceo of a sotware firm that has limited access to debt equity markets. The average return on last year projects is 28 % . and cost of capital is 12%. would npv pr Irr be