Question: Briarcliff Stove Company is considering a new product line to supplement its range line. It is anticipated that the new product line will involve cash investment of $700,000 at time 0 and $1.0 million in year 1. After tax cash inflows of $250,000 are expected in year 2, $300,000 in year 3, $350,000 in year 4, and $400,000 each year thereafter through year 6. Though the product line might be viable after year 6, the company prefers to be conservative and end all calculations at that time.
a) If the required rate of return is 15 percent, what is the net present value of the project? Is it acceptable?
b) Calculate Accounting Rate of Return
c) What is the project's payback period?
d) What is the project's profitability index?
e) What would be the case if the required rate of return was 10 percent?