Question
3. Really Loud Accoustics, Inc (RLA) is considering an investment in a machine to build voice emulation boxes. Projected unit sales are: Year 1 (t=1):
3. Really Loud Accoustics, Inc (RLA) is considering an investment in a machine to build voice emulation boxes. Projected unit sales are:
Year 1 (t=1): 8,100 units
Year 2 (t=2): 8,900 units
Year 3 (t=3): 9,700 units
The machine costs $2,000,000 (at t=0), and will be depreciated over a five-year life. At year 3 (t=3, the instant after the 9,700 units are sold) the machine will be sold for $1,000,000 and all production will cease. This project will require an initial $100,000 investment in net working capital (at t= 0). Net working capital will be increased to $120,000 at t=1 and then reduced to $0 at year 3 (t=3). The selling price of each unit will be $350. Total fixed costs will be $185,000 per year (years 1, 2, and 3), and variable production costs will be $190 per unit. The required return for this type of project is 18%, and the tax rate is 40%.
Should RLA this machine? Why, or why not? (Be sure to provide quantitative justification for you answer.)
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