Question

# Lawson Company is considering production of an electronic tablet with the following associated data: Expected annual...

Lawson Company is considering production of an electronic tablet with the following associated data:

• Expected annual revenues, \$1,500,000
• A projected product life cycle of five years
• Equipment, \$1,600,000 with a salvage value of \$200,000 after five years
• Expected increase in working capital, \$200,000 (recoverable at the end of five years)
• Annual cash operating expenses are estimated at \$900,000.
• The required rate of return is 12 percent.

1. Estimate the annual cash flows for the tablet project by completing the following table. Enter amounts that represent cash outflows as negative numbers.

 Year Item Cash Flow 0 Equipment \$ Working capital Total \$ 1–4 Revenues \$ Operating expenses Total \$ 5 Revenues \$ Operating expenses Salvage Recovery of working capital Total \$

2. Using the estimated cash flows, calculate the NPV (round the discount factor to three decimal places and the present values to the nearest dollar):

NPV = \$

calculation of npv (figures in \$)

 particulars amount of cash flows discounting factor @ 12% discounted value of cash flows equipment 1,647,000 working capital 195,000 total cash outflow 1,842,000 1 -1,842,000 total revenues 1,543,000 less operating expenses 940,000 net cash inflow 603,000 3.605 ( annuity value of 5 years ) 2,173,815 salvage value 189,000 recovery of working capital 195,000 total 384,000 0.567(discount factor if 5 year) 217,728

NPV = \$ 549,543

so this project is acceptable

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