A manufacturing firm is interested developing a new product. Based on a preliminary market analysis, a demand forecast for the product (i.e., a prediction of the number of units sold each year) estimates that 72,000 units can be sold the first year and, after that, sales are expected to decline each year according to an 80% learning curve. The required manufacturing equipment can produce 12 units of product per hour, up to a maximum of 72,000 units per year. It would cost $1,662,500 to purchase and install the equipment, which would have a 10-year useful life. The equipment has an estimated salvage value of $120,000 at the end of its useful life and belongs to the 7-year MACRS property class. The manufacturing process requires the labor of semi-skilled operators who would be paid $36 per hour (including wages and benefits). The cost of the raw materials needed to produce a single unit of the product is estimated to be $72.35. Other costs associated with production include (i) operating and maintenance expenses, estimated to be $80 per hour of operation and (ii) other overhead expenses, estimated to be 8% of each years sales revenue. The firm is subject to a corporate federal income tax rate of 21% and a corporate state income tax rate of 7%, with state taxes deductible from the federal tax. The capital gains tax rate is 15%. Use the information provided above to develop an appropriate financial analysis of this situation that will enable you to answer the following questions. Assume that, if the firm decides to develop the new product, it would plan to produce and sell the item for the full 10-year useful life of the manufacturing equipment; it would stop producing the product after that time.

1) Assuming that the product will sell for $99.95 per unit, what are the before-tax cash flows associated with developing the new product? Given these, and assuming that the firm desires a before-tax minimum attractive rate of return (MARR) of 30%, would you recommend developing the new product? Be sure to explain why or why not.

2) Develop the depreciation schedules for the required manufacturing equipment and also calculate the after-tax cash flows associated with developing the new product when each of the following depreciation methods are used: a) Straight-Line; b) Sum-of-Years Digits; c) 150% Declining Balance; d) MACRS; e) MACRS plus 80% Bonus Depreciation.

3) Which of the preceding depreciation methods is the most financially advantageous to the firm? Explain the reason(s) for your choice.

4) Using the most financially advantageous depreciation method and now assuming that the firm desires an after-tax MARR of 25%, would you recommend developing the new product? Be sure to explain why or why not.

5) Using the most financially advantageous depreciation method, what is the minimum selling price needed to produce an after-tax rate of return of 25%? Be sure to show or explain how you determine this value.