What is the sunk cost of the TW project

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Reference no: EM132806967

Question - Baldwin, a profitable widget maker, has developed an innovative new product called the Turbo-Widget (TW). Baldwin has invested $300,000 in R&D to develop TWs, and expects that TWs will capture a large share of the market. Yes this looks familiar.

Baldwin will have to invest $2 million in new equipment. The machines have a 5-year useful life, with an expected salvage value of $250,000. The machines will require a major overhaul after 3 years, costing $100,000.

Over the five-year product life-cycle, unit sales are expected to be 5,000 units, 8,000 units, 12,000 units, 10,000 units, and 6,000 units. Prices in the first year will be $480, and then will grow 2% annually.

Sales and administrative costs will be $150,000 every year. Production costs will be $500 / unit in the first year, but will decline 8% annually.

Baldwin must maintain approximately 2 weeks inventory of TWs, or 4% (2 / 52) of forecasted annual sales. Inventory can be stored in one of Baldwin's existing warehouses. The firm estimates that inventory will require 3,000 square feet and warehouse space costs $80 / s.f. / year.

Customers don't pay immediately. Baldwin expects to have 30days of sales outstanding as accounts receivable. Raw materials must be paid for immediately.

The tax rate is 34% and the after-tax cost of capital is 12%.

Answer the following questions.

Q1. What is the sunk cost of the TW project?

Q2. What is the Net Operating Income Before Tax of the 4th year of the project (in thousands)? *

Q3. What is the net nominal value of the Equipment Investment Cashflow over 5 years of the project (ignoring the timing of cashflows)?

Q4. What is the net present value of the Equipment Investment Cashflow? After-tax cost of capital is 12%.

Q5. What is the 2nd year net working capital of the project (in thousands)?

Q6. What is the depreciation tax shield of the last year of the project (in thousands)?

Q7. What is the NPV of the project (in thousands)? After-tax cost of capital is 12%.

Q8. What is the IRR (Internal Rate of Return) of the project?

Reference no: EM132806967

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