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

Ask an Expert

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

Write your message here..

Related Questions

Replacement decision, Baobab rolling mills owns a lathe machine which was p... Baobab rolling mills owns a lathe machine which was purchased 10years ago at sh. 75 million. The machine had an expected life of 15 yrs at the time it was purchased, and management

Finance Project, You have just graduated from Stanford''s MBA program and h... You have just graduated from Stanford''s MBA program and have secured a position as a fund manager for a well known investment banking house. You have been given $300 million to m

Accumulated earnings and profits, This is an accounting term which is appli... This is an accounting term which is applicable to stockholders of closely going businesses. Accumulated earnings and profits are a company's net profits after subtracting distribut

Experts averag - forecasting methods, This method simply calculates the ave... This method simply calculates the average of a number of expert estimates. Let E denote the number of experts, and mn,e denote the forecast of expert e, e =1, ... ,E, for SKU n 2N.

Bonds, you buy a car for ths 10000000 to be repaid in 3 years, with annua i... you buy a car for ths 10000000 to be repaid in 3 years, with annua interest of 12%. preapare a loan amortization table

Describe the black-scholes option pricing formula, Question: a) Write d... Question: a) Write down and describe the Black-Scholes option pricing formula with respect to the various determinants of option prices. b) Determine the price of a European

Determine the securities debt or equity of x , X has 10 shareholders, each ... X has 10 shareholders, each of whom owns 100 of its 1,000 outstanding shares of common stock (worth $100 per share).  No other stock is outstanding.  Determine whether the securiti

Derive the fund separation theorem, Question 1: (a) What are the compe... Question 1: (a) What are the competing theories which have been put forward to explain the term structure of interest rates? Which theories do the evidence tend to support?

Venture, what is a co op society and its bye laws what is a co op society and its bye laws

Multinational Business Finance, The Vodafone Corporation arranged a one-yea... The Vodafone Corporation arranged a one-year, $1.5 million loan to fund a foreign project. The loan was denominated in Euros and carried a 10% nominal rate. The exchange rate at