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Attention on the information given Cleveland Enterprises is considering the addition of a new product line. The firm wo

Posted: Mon Nov 15, 2021 5:17 pm
by answerhappygod
Attention on the information given
Cleveland Enterprises is considering the addition of a new
product line. The firm would not need additional factory
space, but it would require the purchase of $2.85
million of equipment installed. The equipment
would be depreciated using a 7-year accelerated depreciation
schedule. Additional inventory of 10% of the first
year’s sales would be necessary, but the entire value will be
recovered at the end of the project. The firm expects to
sell 350,000 units during the first year of the
project, increasing to 375,000 units during the next three years
before decreasing to 100,000 during the fifth and final year of the
project. The product is expected to be obsolete at that
point. The expected sales price is $12 per
unit with a variable cost of $6 per unit
during the first year of operations. Variable costs will
increase by 5% per year, but the sales price
remains fixed. Fixed costs are estimated at
$580,000 during the first year, but will increase
by 6% per year. The firm’s tax
rate is 21%. The equipment has an estimated
salvage value of $500,000.
What is the estimated net present value of the project assuming
a required return of 16%?
Management of the firm is concerned the economy is potentially
entering a recession, which would decrease the demand for the
product to an estimated 100,000 units for all 5 years and force the
firm to drop the price to $9.
What is the estimated net present value of the project assuming
a recession?
Based on your calculations, what recommendations would you make
to the management of Cleveland Enterprises?
PLEASE SHOW THE EXCEL FORMULAS