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(CO I) (Ignore income taxes in this problem.) Sampson Beauty Products Corporation is considering the production...

(CO I) (Ignore income taxes in this problem.) Sampson Beauty Products Corporation is considering the production of a new conditioning shampoo that will require the purchase of new mixing machinery. The machinery will cost $550,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $55,000 at the end of 10 years. The machinery will also need a $35,000 overhaul at the end of Year 5. A $50,000 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 95,000 per year for each of the 10 years. Sampson's discount rate is 16%

. Required: What is the net present value of this investment opportunity? Based on your answer to (a) above, should Sampson go ahead with the new conditioning shampoo?

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Answer #1

(a) Net Present Value: $-133706

Year Cash Flow Factor i=16% PV
0 Cost -550000 1.00000 -550000
0 Working capital -50000 1.00000 -50000
1 to 10 Net cash inflows 95000 4.83323 459156.9
5 Overhaul -35000 0.47611 -16663.9
10 Salvage value 55000 0.22668 12467.4
10 Working capital released 50000 0.22668 11334
Net Present Value -133706

No. Sampson should not go ahead with the new conditioning shampoo since it has a negative net present value.

Note: The discounting factors used are of 5 decimal places and the final answer is rounded off to the nearest whole dollar.

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