Superior Manufacturing Essay
Cash Flows are calculated assuming the initial investment (totalling $1,000,000+$200,000=$1,200,000) is made in Year 0. Revenue from sales, costs including direct labor and material costs and indirect labor costs are treated as expense. Taxes paid are also subtracted from sales revenue to arrive at the cash flow. Taxes are considerably reduced in the first five years due to the impact of depreciation of the plant. Under straight-line depreciation, the depreciated amount in each year constitutes:$$1,000,000/5=$200,000Payback Period (P/B).According to the schedule of accumulated cash flows, $752, 625 of the initial investment of $1,200,000 is repaid after 2 years. The project still has to pay back:$1,200,000-$752, 625= $447,375This amount is divided by the cash flow in Year 3, and this number is added to 2 years. Thus, the project needs approximately 2.98 years to repay the investment.3. NPV is calculated as a sum of PVs of all cash flows in the nine years. Since we arrive at the positive NPV of $982,388, the project will most probably be accepted. However, if the project required additional investment in land and building, this would decrease its NPV due to greater outlays in Year 0. Thus, if these additional investments exceeded $982,388, this would make NPV negative and the project unacceptable from the financial viewpoint.