Gartline has a product it is looking to sell for $40 per unit. Estimate sales for the next three years as follows:
Year 1 15,000 units
Year 2 27000 units
Year 3 5000 units
The new product has a life span of three years. Variable costs are estimated at $4.25 per unit sold and fixed cost total 150000 per year. interest expense on borrowed funds is estimated to be an averages of $5000 per year. Equipment costs are projected to be $75000 plus $2000 for shipping and installation. Equipment will be depreciated using straight line depreciation with an estimated salvage value of $5000. The equipment is estimated to sell at the end of the project for its book value.
The new project is an updated version of an older product. Gartline intends to keep selling the old product but anticipates a decrease in sales of the old product by a constant $2000 per year for the life of the new project. The old product sells for $20 per unit and has valuble cost of $3.50 per unit. The decreased sales will not affect either working capital or fixed expenses.
The company's working capital requirement for the new product is 10% of the next years projected sales. The company is in the 34% tax bracket and has a required rate of return of 15% on projects with this risk profile. Prior to producing the new product, Gartline paid $100,000 developmental costs to determine the feasibility of the new produt line.
What is the operating cash flows for each of the three years, the net present value, and the IRR? Explain your answers.