Reference no: EM132637588
Under a special licensing arrangement, Swinyard Corporation has an opportunity to market a new product for a 5 year period. The product would be purchased from the manufacturer, with Swinyard responsible for promotion and distribution costs. The licensing arrangement could be renewed at the end of the five-year period.
After careful study, Swinyard estimated the following costs and revenues for the new product:
Cost of equipment needed 60,000
Working capital needed 100,000
Overhaul of the equipment in 4 years 5,000
Salvage value of the equipment in 5 years 10,000
Annual revenues and costs:
Sales revenues 200,000
Cost of goods sold 125,000
Out of pocket operating costs (for
Salaries, advertising other direct costs 35,000
Problem 1: At the end of the 5 year period, if Swinyard decides not to renew the licensing arrangement the working capital would be released for investment elsewhere. Swinyard uses a 14% discount rate. Would you recommend that the new product be introduced?
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