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12.35 You are the project manager for Eagle Golf Corporation. You are considering manufacturing a new golf wedge with a unique groove design. You have
12.35 You are the project manager for Eagle Golf Corporation. You are considering manufacturing a new golf wedge with a unique groove design. You have put together the estimates in the following table about the potential demand for the new club and the associated selling and manufacturing prices. You expect to sell the club for five years. The equipment required for the manufacturing process can be depreciated using straight-line depreciation over five years and will have a zero salvage value at the end of the project's life. No additional capital expenditures are required. No new working capital is needed for the project. The required return for projects of this type is 12 percent, and the company has a 23 percent marginal tax rate. You estimate that there is a 50 percent chance the project will achieve good sales and a 25 percent chance it will achieve either the weak or strong sales outcomes. Should you recommend the project? 12.36 You are working for Eagle Golf Corporation as described in Problem 12.35. A different equipment manufacturer is recommending its "Wedge 2100" club-making machine. The initial cost of the Wedge 2100 is $1,070,000, and the fixed costs of production will be $260,000 per year. However, because the Wedge 2100 is much more efficient than the original machine, its variable cost per unit will be $63. Assume that you will choose one of the two machines. (a) If the other financial information in Problem 12.35 applies, do you recommend the original machine or the Wedge 2100? (b) After seeing a news report that the demand for golf equipment is surging, your CFO believes that the most likely sales outcome is 15,000 units per year. Does the updated sales forecast from the CFO change your recommendation
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