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
#queM&A E-III Corp. is investigating the possible acquisition of Silicon Inc. Assume that both firms have no debt outstanding. E-III Corp. Silicon Inc. Pre-announcement stock price

1. A contributes property to X, a newly formed corporation, in exchange for 75 shares.  As part of the same transaction, B contributes services to X in exchange for the remaining 2

Hello, can you help me to calculate the Discount rate and Internal Rate of Return?

The Chang Co is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operations has a book value and a market value of zero. However

Consider the subsequent information about four different projects. Each requires an initial outlay of Rs2,000,000 but the firm only has funds to undertake one project. The firm ha

5. Produce a cash budget and determine the statement of external financing required for NSP Inc. for the months of December and January using the following information: • NSP Inc.

Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.10 million.

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


What effects have mergers had on fees assessed for retail bank services? A: The impact is not clear. Market conditions and the level of competition often determine the cost for