Ingersoll Bakery wants to introduce a new product, pepperoni bread. This product was test marketed six months ago at a cost of $1,500 with promising results. Ingersoll needs to buy a machine to produce this new product. The price of the machine is $13,000 and installation cost is $2,000. The machine will be depreciated using the straight-line method to a book value of $600 over the four-year life of the project. The machine has an expected salvage value of $800 at the end of its four-year life. To produce this new product Ingersoll will have to invest an additional $1,600 in net working capital. Current annual product sales are $45,000. Pepperoni bread sales are projected at $15,000, but $1,000 will be sales from customers who switched from other Ingersoll products. Cost of goods sold will increase by $4,000 and selling expense will increase by $2,000. The tax rate is 35% and the required rate of return is 12%.
1. Calculate the initial outlay, annual operating cash flow and terminal cash flows. Complete the table with the timeline and calculate the NPV and IRR of the project.
2. Create a Data Table that shows changes in NPV, when required rate changes (8%, 10%, 12%, 14%, 16%).
3. The required return is estimated 12% or 16%. Create combo box for the two different required returns.
4. The company expects the equipment to be actually sold for $800, $1,200 or $2,000 after 4 years. Create option buttons for the three different market values and group together the option buttons.