Problem
The Fluffy Feather sells customized handbags. Currently, it sells 5,000 annually of a high-priced line of handbags for $250 each, and 10,000 annually of a low-priced line of handbags for $55 each. The firm is considering adding a medium-priced line of handbags that will be kept for four years. It hopes to sell 7,000 of the medium-priced handbags at $125 each. An independent consultant has determined that if the new line is introduced, sales of its existing high-priced handbags will most likely decline by 1,250 per year while the sales of its low-priced handbags will probably decline by 1,850 per year. Variable costs for this new line will run about $20 per bag, and fixed costs for the new line will run $50,000 per year. To build the new line, the company will expand on some land that it currently owns. The initial cost of the land was $105,500 and it is currently valued at $210,000. The company has some unused tools that could be used for this new line if $10,200 is spent for modifications. These tools were purchased three years ago for $38,000 and has a current market value of $20,000. Further, the company will need to invest a total of $650,000 in new manufacturing equipment, which is five-year MACRS property for tax purposes. In four years, the equipment will be worth about one fourth of what we paid for it. The land can be sold for $350,000 after taxes when the line is closed. At the beginning of the project, inventories will increase by $302,000, and accounts payable will increase by $102,200. After that, total net working capital requirements will increase by $5,000 every year starting from Year 1. All investments in net working capital will be recovered at the end of the project. The required rate of return is 14 percent and the tax rate is 21 percent. What is the project's NPV? Should the project be accepted based on NPV?