Problem -
We PROMOTE is in the promotional materials business. The project being considered is to manufacture a very unique case for smart phones. The case is very durable, attractive and fits virtually all models of smart phone. It will also have the logo of your client, a prominent, local company and is planned to be given away at public relations events by your client.
As we know from prior cases involving this company, more and more details of the project become apparent and with more precision and certainty.
The following are the final values to the data that you have been estimating up to this point:
- You can borrow funds from your bank at 3%.
- The cost to install the needed equipment will be $105,000 and this cost is incurred prior to any cash is received by the project.
- The gross revenues from the project will be $25,000 for year 1, then $27,000 for years 2 and 3. Year 4 will be $28,000 and year 5 (the last year of the project) will be $23,000.
- The expected annual cash outflows (current project costs) are estimated at being $13,000 for the first year, then $12,000 for years 2, 3, and 4. The final year costs will be $10,000.
- Your tax rate is 30% and you plan to depreciate the equipment on a straight-line basis for the life of the equipment.
- After 5 years the equipment will stop working and will have a residual (salvage) value of $5,000).
- The discount rate you are assuming is now 7%.
Requirements of the paper:
- Perform the final NPV calculations and provide a narrative of how you calculated the computations and why.
- Then provide a summary conclusion on whether you should continue to pursue this business opportunity.
- Research, using at least three sources other than the textbook materials that support your calculations and conclusions.
Papers will be assessed on the following criteria:
- Provide the final, accurate NPV calculations.
- A narrative on how the NPVs were calculated. The narrative should include how the data relating to depreciation and its tax consequences affect the cash flow of the project.
- Supporting narrative based on research of sources other than the textbook materials.
- Provide a conclusion on whether this business opportunity should be pursued.