Emery Communications Company is considering the production andmarketing of a communications system that will increase theefficiency of messaging for small businesses or branch offices oflarge companies. Each unit hooked into the system is assigned amailbox number, which can be matched to a telephone extensionnumber, providing access to messages 24 hours a day. Up to 20 unitscan be hooked into the system, allowing the delivery of the samemessage to as many as 20 people. Personal codes can be used to makemessages confidential. Furthermore, messages can be reviewed,recorded, cancelled, replied to, or deleted all during the samemessage playback. Indicators wired to the telephone blink whenevernew messages are present.
To produce this product, a $1.75 million investment in newequipment is required. The equipment will last 10 years but willneed major maintenance costing $150,000 at the end of its sixthyear. The salvage value of the equipment at the end of 10 years isestimated to be $100,000. If this new system is produced, workingcapital must also be increased by $90,000. This capital will berestored at the end of the product's 10-year life cycle. Revenuesfrom the sale of the product are estimated at $1.65 million peryear. Cash operating expenses are estimated at $1.32 million peryear.
Required:
1.Prepare a schedule of cash flows for the proposedproject. (Assume that there are no income taxes.)
2.Assuming that Emery's cost of capital is 12%, computethe project's NPV. Should the product be produced?
