ACME Kitchen Appliances Co. is a manufacture of a variety of electric kitchen appliances, refrigerators, dishwashers, etc. The company is located in York, P.A. Last year, the company spent $70 million to acquire the patent right for an artificial intelligence (AI) technology for dishwashers that senses the contents inside a dishwasher and optimizes the temperature and the amount of water that is used during a wash cycle. The eco-friendly technology has been proven so successful that, once adopted, it will help save water as much as 20% and electricity as much as 15% compared with conventional dishwashers. Using the technology, the company now plans to launch a new model called Smarty. The R&D department of the company invested $30 million last year to incorporate the AI technology to the control unit of the machine.

Given the recent trend in the home electric appliances market, ACME Kitchen Appliances expects that the marketability of Smarty will last for the next seven years, after which its AI technology will become obsolete and be replaced by newer and better technologies. The annual sales volume of Smarty for each of the next seven years is projected as follows:

[Table 1] Annual Unit Sales of Smart One Year 1 2 3 4 5 6 7

Sales (Unit) 50,000. 95,000. 140,000 170,000 120,000 70,000. 30,000

With the expected unit production cost of $650, the sales price of Smarty has been set at $800. ACME Kitchen Appliances does not operate any manufacturing facilities and outsources all of its products to suppliers. In the case of Smarty, the company plans to outsource the production of the model to Hendersons Manufacturing Co., which is also located in the York area. The afore-mentioned unit cost of $650 is all paid to Hendersons.

Once the dishwashers are manufactured by Hendersons, they will be shipped to one of the operation facilities of ACME Kitchen Appliances in which the dishwashers will be tested for any functional defects with a testing machine that is specially designed for the testing purpose. The testing machine should be purchased at $35 million if the Smarty project is accepted. The machine will be depreciated over seven years with straight line depreciation. While fully depreciated after seven years, according to industry experts, the machine can still be sold in the market for 10% of its original purchase value once the project is over.

The selling and general expenses for the Smarty project are expected to be $5 million each year throughout the life of the project. The corporate tax rate is 25 percent. The required rate of return for the project is 10 percent.

ACME Kitchen Appliances considers to use an empty warehouse it owns as a place to store finished products. The warehouse is currently empty. But it is expected that the facility can be rented out for $700,000 per year. One concern that the companys management has with the new project is that the new product might affect the sales of the existing lines of dishwashers that the company is currently selling. The companys sales team forecasts that the introduction of Smarty will hurt the sales of the existing models: with a projected loss that is equivalent to 12.5% of the projected annual sales of Smarty (with the same 12.5% of the cost of goods sold) from the existing lines of dishwashing machines.

Net working capital is one component that should always be considered as an important part of investment cash flows. The industry practice for estimating net working capital requirements for electric home appliance production is the accounts receivable of as much as 20 percent of the annual sales and the accounts payable of about 20 percent of the costs of goods sold each year. Since ACME Kitchen Appliances does not manufacture the product, it does not need to carry inventory for parts and other raw materials. However, to meet changing demands, it needs to maintain inventory of finished products for 10 percent of expected annual sales.

ACME Kitchen Appliances uses the four investment selection rules including NPV, IRR, profitability index, and payback period. The company applies one half of a project life as the cutoff period to any investment projects it considers. Should the firm choose to produce Smarty?

Can you calculate NPV, IRR, Profitability Index, and Payback Period of Smarty? And provide me a decision whether to produce Smarty or not.