Financial Management

Background History Superior Manufacturing is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project requires a new plant that will cost a total of $1,000,000, which will be depreciated straight line over the next five years. The new line will also require …

…of money invested on this topic the NPV could become negative and in that case the project will be rejected via the NPV criterion. Also note that the current payback period is more the limit of 3 years, so any additional investment will even increase the payback period, this will activate the red light for this project due the payback policy, and the project will be rejected, despite of the possibility that the NPV remains positive.