Julian's has spent $28,200 to design a new airline carryon bag. It spent another $48,500 testing various materials for their durability. An additional $75,000 was spent on test marketing to determine both the market demand and color preference. Since the test marketing proved successful, the firm is now compiling data to evaluate the addition of this bag to its production runs. The estimated production startup costs are $641,300 and annual costs thereafter of $49,000. The discount rate is 12 percent and the estimated life of the project is 6 years. What value should be used for the Time 0 cash flow

Question

Business

Sabrina

27 December, 13:51

Julian's has spent $28,200 to design a new airline carryon bag. It spent another $48,500 testing various materials for their durability. An additional $75,000 was spent on test marketing to determine both the market demand and color preference. Since the test marketing proved successful, the firm is now compiling data to evaluate the addition of this bag to its production runs. The estimated production startup costs are $641,300 and annual costs thereafter of $49,000. The discount rate is 12 percent and the estimated life of the project is 6 years. What value should be used for the Time 0 cash flow

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Terrance Garcia · Answer 1

Time 0 cash flow = 641,300

Explanation:

On Time 0 we should post the relevant cost for the decision

The development cost are sunk cost. Those cost are already incurred. These were expended already. Doing or not doing the carry-on bag will not save those cost. The Time 0 cash flow should be the 641,300 start-up cost.

If the sales revenue of the carry-on bag generates a NPV to cover the investment on the production line and their annual cost, it is a gain for Julian's

The annual cost will be placed on each year and subtracted from the cash inflow of the product.