Ralph’s Bow, Inc. (RBI) located in Cooper City, Florida is planning to add a new line of bow ties and socks to its brand of products. The new line will require the acquisition of new knitting and tying machines. The machine will cost $1,500,000. It is classified as a l0-year MACRS asset and will be depreciated as such. Shipping costs of the machines from Tie Plant, Mississippi to Cooper City, FL are estimated to be$6,000. RBI also needs to modiff the Rotary ironing press that comes with the machines at a cost of $12,000 to be able to use it for other products like towels, pillowcases and bedspreads. The expected salvage (market) value of the machines at the end of S-year project life is $120,000. The decision to add the new line of bow ties will require additional net working capital of $50,000 immediately but that is expected to go up by 30% next year, now that the President has approved a new minimum wage and this will remain at that level for the rest of the project life. RBI expects to sell 300,000 pieces of the bow ties during each of the 8 years of product life at the cost of $25 per tie. It also expects the sale of its other ties to be eroded by $75,000 per year as a result ofadding this new line of ties. The lost sales level will remain constant at $75,000 over the 8-year life of the proposed project. RBI will realize savings of $ 15,000 each year because of lost sales on its other tie lines as some temporary workers are expected to be laid off. The variable costs of producing and selling the ties are estimated to be 7 5oh of sales. Rent, permits and other fixed costs are expected to be $850,000 but increase with at aTYo inflation rate over project period. The marginal tax rate is 39 percent and the company’s cost of capital is l3%. a) Compute the Net Present Value b) Compute the Internal Rate of Return for this project.
Offcanvas menu