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2. The Colorado Brewing Company is considering producing a new beverage. This beverage project requires an initial investment (i.e., at t-0) in equipment of $300,000.
2. The Colorado Brewing Company is considering producing a new beverage. This beverage project requires an initial investment (i.e., at t-0) in equipment of $300,000. At t-3, the company plans to sell the equipment for $5,000. The equipment can be depreciated according to the three year Modified Accelerated Cost Recovery System (MACRS) schedule, which allows depreciation of 33.33% at t=, 44.45% at t=2, 14.81% at t=3, and 7.41% at t=4. Depreciation will be based solely on the initial cost of the equipment (i.e., when calculating depreciation, ignore any salvage value). This project is expected to produce sales revenue of $400,000 the first year (i.e., at t-1); this revenue will increase by 20% per year over the next two years (i.e.. t-2 and t-3). Manufacturing costs are estimated to be 60% of sales. A key marketing study was completed last year; the cost of this study was $50,000. The project requires an investment in working capital. Specifically, at each point in time, working capital must be maintained at 10% of next year's forecasted sales revenue. Working capital will be fully recovered at t=3. The corporate tax rate is 25. The company's tax situation is such that it can make use of all applicable tax shields and deductions It the opportunity cost of capital is 16*, is this a good project or a bad project
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