Reference no: EM132397634

There is a sports shoes manufacturer. Having spent $120,000 on market research, the firm finds a new line of sports shoes promising and considers making new investments on it. For further evaluation, the following are investment and operational data for the new sports shoes product line.

New Equipment costs $14,000,000 and has 5 years economically useful life with zero salvage value. Also, the depreciation is calculated on the straight-line basis.

Incremental investment in Net Working Capital (NWC) at the beginning of the project is $1,000,000. 

New Sports Shoes Product: 45,000 pairs of new sports shoes will be sold every year in the next 5 years, each pair of new sports shoes will be sold for $700. The variable cost is $320 per pair and fixed cost (excluding depreciation) per year is $7,500,000.

The launch of new sports shoes product would lower the sales volume of existing sports shoes product by 13,000 pairs per year in the next 5 years, and sales price and variable cost for each pair of existing sports shoes product are $500 and $280 respectively.

If there is 40% corporate tax rate, what is the amount of initial outlay, operating cash flow per year and terminal cash flow of the new sports shoes project.

Also, the total after-tax cash flow for the project from year 0 to year 5.

And if the required rate of return is 15%, should the firm invest in the new project if the net present value rule is used?