Financial Management by Timothy Gallagher - Article Example

The value is positive and quite significant, therefore, based on the NPV criteria the project should be accepted and the new product launched. However, if the company considers several mutually exclusive projects (for example, launching this product or investing instead in the new factory to increase the production of a highly-demanded existing product, etc.) and the NPV of this particular project is lower than of those also under consideration, it would be abandoned. The initial investment is equal to $1,000,000.

The sum of the discounted cash flows for the first three years amounts to $807,801 < $1,000,000. The sum of the discounted cash flows for the first four years is equal to $1,119,768 > $1,000,000. Therefore, the payback period is 3.62 years. Based on the Superior Company's policy of not accepting projects with a life of over three years, the project of launching the new product under consideration should not be accepted. If the project required additional investment in land and building, it would increase the initial capital investment amount and consequently decrease the NPV of the project.

This effect would be partly offset by the tax shield because of depreciation of building, and the difference between salvage and book values of land and building if sold afterward.