A company is evaluating a new product proposal that will last 6 years.
The initial outlay is $2 million. The proposed product selling price is $220 per unit and the variable costs are $55 per unit and sales are planned to be 2,750 units each year. The incremental cash fixed costs for the product will be $3,750 per annum.
What is the NPV of this project is the cost of capital is 10%.
A $40,250
B -$40,250
C $190,600
D -$190,600
How do I calculate the annual cash flow? I'm stuck with the 'Fixed Costs' part. Should it be included in the annual cash flow or excluded from it.
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NPV calculation
3y ago#1They are incremental (i.e. extra) cash outlows, and so should be included in calculating the annual cash flow.
So the net cash inflow each year is (2,750 x (220 - 55)) - 3,750 = $45,000.
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