Estimate the initial investment outlay of the project

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Reference no: EM132977868

Question: The Axerold Company is considering producing a new product. It has recently completed a $400,000 two-year market study to judge the likely popularity of the new product. Based on the results of the study, Axerold has estimated that 10,000 units of its new product can be sold annually over the next six years at a price of $9,615 each. Variable costs per unit are $7,400 and fixed costs total $12 million a year. Working capital specifically for this project is estimated to be $2 million and will be returned at the end of the project's life.

The project requires the purchase of a new machine costing $40 million. The machine will be fully depreciated using a straight-line method over its life of six years. The company expects the machine to have a market value of $500,000 at the end of its life.

The tax rate applicable to Axerold is 30%. The after-tax discount rate is 10% per annum to calculate NPV of the project.

REQUIRED:

(a) Should the cost of the marketing study be included in the project evaluation? Explain.

(b) Estimate the initial investment outlay of the project.

(d) Estimate the terminal-year net cash flow.

(e) Calculate the NPV of the project and advise if the project should be undertaken.

Reference no: EM132977868

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