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Williams Fasteners is considering a project to make an improved stapling product for sale to industrial packaging customers.
Williams Fasteners is considering a project to make an improved stapling product for sale to industrial packaging customers. The head of the division wants to develop a quick financial analysis to determine if he should spend more effort to develop a formal capital project proposal to send to the corporate office.She assumes that the fixed capital investment will be $10,000,000; revenues in year 1 will be $5,000,000 and grow at 5% per year; expenses before depreciation will be $2,000,000 in year 1 and grow at 4% per year: the tax rate is 35% and net working capital will be 10% of sales. And she assumes a discount rate of 12% is appropriate.She estimates the project life to be 8 years and uses straight line depreciation, and conservatively assumes no recovery of working capital at the end of the project.Concerned that some loss of sales will be incurred to an existing product line, she assumes that pretax margin losses equal to 10% of the new project sales will occur for 4 years then no longer occur.She is also interested in what the project economics look like if sales are either 10% greater of 10% less than her base estimate.Should the project be given further attention given the above assumptions. Support your answer with appropriate calculations.
