you are considering a new product launch. the project will cost $1,675,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. sales are projected at 195 units per year; price per unit will be $16,300, variable cost per unit will be $9,400, and fixed costs will be $550,000 per year. the required return on the project is 12 percent, and the relevant tax rate is 21 percent.

We must first ascertain the net cash flow for each year of the project in order to compute the net present value (NPV) of the project. By deducting the total costs from the total revenue for each year, the net cash flow is computed.

We must first figure out the overall income for each year. This is computed by multiplying the annual sales volume by the average selling price per unit. For instance, the total revenue in the first year would be 195 units * $16,300/unit = $3,199,500.

The cost of each year's total expenses must then be determined. The fixed costs and variable expenses make up the total costs. By dividing the quantity of units sold annually by the variable cost per unit, the variable costs are determined. The variable costs, for instance, in the first year would be 195 units * $9,400/unit = $1,843,000. Each year, the fixed costs remain constant at $550,000.

As a result, the following formula is used to determine each year's net cash flow:

Year 1: $3,199,500 - ($1,843,000 + $550,000) = $806,500

Year 2: $3,199,500 - ($1,843,000 + $550,000) = $806,500

Year 3: $3,199,500 - ($1,843,000 + $550,000) = $806,500

Year 4: $3,199,500 - ($1,843,000 + $550,000) = $806,500

We must use the needed return on the project as the discount rate to convert the net cash flows for each year to their present value in order to get the project's net present value, or NPV. The following equation can be used to determine a cash flow's present value:

Cash Flow / (1 + Discount Rate) Equals Present Value Quantity of Periods

For instance, we would perform the following computation to get the present value of the net cash flow in year 1:

Present Value (Year 1) = $725,891 / (806,500 / (1 + 0.12) 1)

This procedure can be repeated to determine the present value of the net cash flows for each year of the project. The entire NPV of the project can be calculated by adding the present values of the net cash flows for each year.

Finally, we must think about the project's tax ramifications. We must determine the net cash flows after taxes for each year because it is anticipated that the net cash flows are taxable. The net cash flow for each year is multiplied by to determine the net cash flow after taxes (1 - tax rate). For instance, the year 1 after-tax net cash flow would be $806,500. (1 - 0.21) = $640,155.

The NPV of the project can then be calculated using the net cash flows after taxes, as previously mentioned.

The total net present value (NPV) of the project is the sum of the after-tax net cash flows for each year, less the $1,675,000 original investment. The project may be worth considering if the NPV is positive, which indicates that a good return is anticipated. If the NPV is poor.

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