Wernham-Mifflin is
considering launching a new line of septagonal-shaped paper. You have the
following information:
• Revenues due to the sale of the new product
are expected to be $86 million annually. Of this, 63% will be by cash with the
remainder sold on credit. Credit sales are expected to start being repaid after
2 years.
• Total paper production costs will increase
from the current level of $13 million annually to $44 million annually after
the product launch.
Hyper-aggressive sales agent Dwight Schrute
will be reassigned from other projects to sell the new product line. Customers
of those other products will be relieved and sales will increase by $16 million
annually.
• The project will make use of an existing
paper mill, built last year at a cost of $74 million. The mill is being
depreciated using prime cost over a useful life of twenty-two years.
• However, due to this
decision, machinery in the mill will need to be retrofit at a cost of $60
million at t=0. The retrofit machinery has a useful life of nineteen years.
• Wernham-Mifflin
currently pays taxes at an overall tax rate of 35% and a marginal rate of 38%.
What is the incremental
cash flow from the project for the first year (at t= 1)?
O a. $26.33 million
O b. $23.15 million
O c. $23.78 million
O d. $24.91 million
e. $25.49 million
