Axillar Beauty Products Corporation is considering the production of a new conditioning shampoo which will require the purchase of new mixing machinery. The machinery will cost $375,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $50,000 at the end of 10 years. The machinery will also need a $35,000 overhaul at the end of year 6. A $40,000 increase in working capital will be needed for this investment project. The working capital will be released at the end of the 10 years. The new shampoo is expected to generate net cash inflows of $85,000 per year for each of the 10 years. Axillar's discount rate is 16%.

questions:

Required
What is the net present value of this investment opportunity?

Based on the answer above sure Axillar's go ahead with the new conditioning shampoo?



Please help me to answer. Thank you

Were you given Axillar's effective tax rate, or is this NPV to be computed without regard to income tax? I'd guess the latter, since you seem to have posted the question in its entirety... but just confirm that for me.

To start, show the cash flow schedule associated with this proposed project. 0 = now; 1 = one year from now; etc. Show inflows as positive amounts; outflows in parentheses. Remember that an increase in working capital is considered a cash outflow, and any reduction (or "release") of working capital is an inflow. Let's round everything off to the nearest thousand. I'll kick it off, you finish...

0: (375) + (40) = (415) net outflow
1: 85 net inflow
2: 85 net inflow

... back to you.

NPV = -375,000 – 40,000 + (50,000 x 0.2267) – (35,000 x 0.4104) + (40,000 x 0.2267) + (85,000 x 4.8332) = $1,861