Question
Axiom Berhad projects unit sales for a new fitness equipment as follows: Year Unit Sales 1 4,200 2 3,500 3 4,000 The estimated selling price
Axiom Berhad projects unit sales for a new fitness equipment as follows:
Year | Unit Sales |
1 | 4,200 |
2 | 3,500 |
3 | 4,000 |
The estimated selling price of the fitness equipment is $1,200 per unit. The variable costs are $800 per unit while the fixed costs are $500,000 per year. The project requires an initial investment of $650,000 in assets, and it will be depreciated using the reducing balance method of 40% per year. In Year 3, these assets can be sold for 20 percent of their acquisition cost. The company will also incur repair and maintenance costs of $100,000 per year for these assets.
Production of the fitness equipment will require investment in net working capital of $130,000. However only $30,000 of the net working capital will be recovered when the project ends. The tax rate is 25 percent, and the required rate of return is 12 percent.
Should Axiom Berhad invest in this project? Why?
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