Parker Products manufactures a variety of household products. The company is considering introducing a new detergent. Th

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Parker Products manufactures a variety of household products.
The company is considering introducing a new detergent. The
company's CFO has collected the following information about the
proposed product. (Note: You may or may not need to use all of this
information, use only the information that is relevant.)
· The project has an anticipated economic life of 4 years.
· The company will have to purchase a new machine to produce the
detergent. The machine has an up-front cost (t = 0) of $2 million.
The machine will be depreciated on a straight-line basis over 4
years (that is, the company's depreciation expense will be $500,000
in each of the first four years (t = 1, 2, 3, and 4). The company
anticipates that the machine will last for four years, and that
after four years, its salvage value will equal zero.
· If the company goes ahead with the proposed product, it will
have an effect on the company's net operating working capital. At
the outset, t = 0, inventory will increase by $440,000 and accounts
payable will increase by $140,000. At t = 4, the net operating
working capital will be recovered after the project is
completed.
· The detergent is expected to generate sales revenue of $2
million the first year (t = 1), $3 million the second year (t = 2),
$4 million the third year (t = 3), and $4 million the final year (t
= 4). Each year the operating costs (not including depreciation)
are expected to equal 60 percent of sales revenue.
· The company's interest expense each year will be $400,000. ·
The new detergent is expected to reduce the after-tax cash flows of
the company's existing products by $200,000 a year (t = 1, 2, 3,
and 4).
· The company's overall WACC is 10 percent. However, the
proposed project is riskier than the average project for Parker;
the project's WACC is estimated to be 12 percent.
· The company's tax rate is 40 percent.
Estimate the project net cash flows. Make sure to put the cash
flows in order: CF0, CF1, CF2, CF3, CF4, CF5. Round it to a whole
dollar, and do not include the $ sign. Also compute the project's
NPV. Round it to a whole dollar, and do not include the $ sign.