Plans to introduce new product to the market

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Reference no: EM131087738

Kramerica Industries plans to introduce a new product to the market. Last week, Kramerica hired a marketing firm to develop a TV ad for the product. The marketing firm will develop the ad regardless of Kramerica's decision to continue the project or not. The project will require additional working capital of $300,000 which will be recovered at the conclusion of the project. The firm has spent $250,000 on R&D for this project. To launch the project Kramerica will have to invest $26 million today in plant and machinery. The plant and machinery have an economic life of 20 years and a salvage value of $4 million. The project is expected to generate sales of $9 million per year for 20 years. Of these, 20% are due to lost sales of the existing products of the company. The incremental variable cost of producing the product is $3.4m. Fixed costs are $700,000 per year. Kramerica's accountants have allocated $400,000 in managerial salaries to the project but no additional managers need to be hired. The company uses straight line depreciation. It has a marginal tax rate of 40% and a 10% cost of capital. The cash flow in year 5 (t=5) is $________.

Reference no: EM131087738

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