Woodbridge Manufacturing is also considering developing a newassembly line on which to build another new product (not covered inthe text). In what category should the costs listed below beplaced:
Initial investment outlay (time0)
Supplemental annual cash flows (time1 through timeN)
Terminal value (timeN), or Disregarded?
Also state your reasoning for choosing that classification.Consider each element individually.
This product has been developed over the past three years, at atotal cost of $125,000.
The building that Woodbridge is planning to be used is currentlyrented out to another company for $10,000 per month, and they areon a month-to-month lease so the lease can be terminated with 90days' notice.
The new product will replace a current product, which is currentlygenerating $12,000 per month in free cash flow (cash earnings lessapplicable costs).
The machines will cost $750,000.
Travel to see similar machines in operation at another company'sfactory costed $3,500.
Freight and installation for the machines will cost $75,000.
It is projected that the additional inventories valued at $80,000will be required to support sales of the product.
Woodbridge will offer 90 day credit terms to purchasers of the newproduct which are expected to expand accounts receivable by anaverage of $145,000.
The gross profit (or gross margin) on the sales of the product isexpected to be $360,000 per year for the five years of theproject.
Purchases of material for the project is expected to increase thebalance of the accounts payable by $32,000 during the projectlife.
Interest on a loan taken out around the time of starting theproject will be $12,000 per year.
The salvage value of the machines is expected to be $236,000 at theend of the project.
